Monthly Archives: July 2015

7 Common Lies That Can Totally Destroy Your Home-Buying Chances

7 Common Lies That Can Totally Destroy Your Home-Buying Chances

By
Credit.com

Liar with fingers crossed

Dori OConnell/istockphoto

Let’s start with the (blatantly) obvious: Getting a mortgage and buying a house involves a lot of money. And the answers you give on your mortgage application have a direct impact on how much money you’ll get approved for—or whether you’ll be able to get the loan in the first place. So it’s not surprising that some people may be tempted to fudge the facts just a bit.

After all, it’s just paperwork, and a little white lie. What can it hurt?

A lot, actually. In fact, it can make the process downright excruciating.

To begin with, the phrase “little white lies” is a bit of a misnomer as far as mortgage applications are concerned. If you’re fudging the facts in a way that affects your costs or ability to get the loan, that small untruth is likely to turn into a whopper. And since lenders verify most of the key information on your application, your chances of getting away with it aren’t very good to begin with.

What are the possible consequences? Getting turned down for the mortgage is the least of them. If your falsehood is discovered after you get the loan, your lender could boost your interest rate or even demand immediate repayment in full. Tax-related falsehoods could get you in trouble with the IRS.

In addition, penalties for mortgage fraud—which is what lying on a mortgage application is—range as high as 30 years in prison and a $1 million fine. You likely won’t face a penalty like that for a small exaggeration or omission, but you could still end up with a fine and a conviction.

The following “white lies” might seem fairly harmless but could get you into hot wateronce the truth comes out.

1. Who will live in the house

This is one of the most common. A person applies for a mortgage to buy a home as their primary residence when they actually plan to rent it out as an investment property. The benefit is that lenders charge higher interest rates on loans to buy investment properties than they do for a primary residence.

The borrower might think, “What difference does it make? A loan is a loan. I’m responsible for it either way.” But lenders know that default rates are higher on investment properties than they are on primary residences—people try harder to keep up the payments when their own homes are on the line—and that’s why they get lower rates than investors do. Minimum down payments are significantly larger on an investment property as well.

From the lender’s perspective, you’re stealing money from them by making them take on more risk than they agreed to. And risk costs money.

And don’t assume your lender won’t find out. There are several red flags that can tip them off. Buying a home in a neighborhood that doesn’t fit your socioeconomic profile is one. Another would be if your mortgage statements are being sent to a different address than your new “primary residence.” Either might cause your lender to send someone to investigate.

2. How much money you make

It’s really hard to exaggerate your income on a mortgage application. For one thing, your lender is going to verify all of the financial information you provide on your application, so if your tax returns, bank statements, W-2 forms, and the like don’t support your income claims, you won’t get the loan.

The tax return is the big one. Your lender is going to request copies of your two most recent ones, and will obtain them directly from the IRS—you can’t simply alter your own copies and try to submit them. If you do, your lender is going to wonder why your copy and the one from the IRS don’t match.

People who are self-employed sometimes feel they have a bit more room to fudge things, since they’re reporting their own income. But again, your tax return is going to tell the tale. You might exaggerate your earnings on the profit-and-loss statements from your business, but unless those also match up with your tax returns, you’re going to have a hard time getting your lender to buy those figures.

3. The origin of your down payment funds

Here’s one that many borrowers think is harmless: You’re short of cash for a down payment, so you ask a family member to front you the necessary funds, and pay them back later. What’s the harm in that?

The problem is that when you apply for a mortgage, you need to disclose all your other debt obligations on the application—and that loan from a family member is one of them. It represents part of your financial burdens that will compete with your mortgage payments for your financial resources. So your lender will want to know about it.

If you receive down payment assistance from a relative or anyone else, most of the time your lender will want you to provide a letter from them stating that the funds are a gift and do not need to be repaid.

4. Undisclosed incentives/rebates

In some real estate transactions, borrowers and lenders are tempted to “sweeten the pot” by making a side deal apart from the declared sale price of the home itself. Often, this is in the form of a rebate or kickback from the seller to the buyer when the asking price is greater than the buyer is willing to pay.

The seller may offer to cover the buyer’s closing costs above and beyond what is normal and declared. In some cases, the seller may even cover the buyer’s down payment. Such arrangements may be allowed in some situations, but what makes them fraudulent is when the lender is out of the loop—when they’re done separately from the official sales transaction and without the lender’s knowledge.

The harm here is that the lender is being tricked into financing more than the actual sale price of the home—so the lender is taking on more risk than expected and would have a harder time recovering the money in the event of a default.

5. A bogus co-borrower

In some cases, a borrower who doesn’t earn enough to qualify for the desired mortgage may seek to enlist a bogus co-borrower. The co-borrower, often a relative, falsely states that he or she plans to occupy the residence and contribute toward paying the mortgage, and so his or her income is counted toward qualifying for the mortgage.

The party who really gets hurt with this one are the co-borrowers. Even if they aren’t actually contributing toward the mortgage, it’s listed as an obligation on their credit report. So if they later decide to buy their own home or take out some other large loan, it’s going to hurt their debt-to-income ratio.

In addition, they could get stuck with the loan itself if you’re unable to keep up with the payments, since they also signed off on the loan. Not only that, but any payments you might miss will damage their credit as well, since both of you are equally responsible for the mortgage.

6. Your employment status

People will sometimes be tempted to stretch the truth a bit when it comes to reporting their employment on a mortgage application. For example, claiming you’ve been working for a company for three years when you’ve been there for only one—because lenders want to see at least two years of steady employment before approving a mortgage (changing jobs in the same field is OK).

In other cases, they may claim to own a nonexistent small business or get a friend to pose as an employer for whom they work at least part time. But neither of these will help unless your tax returns support the income you claim.

7. Hidden liabilities

One of the keys to getting approved for a mortgage is your debt-to-income ratio. That is, how much of your earnings you have to pay out each month to cover all your debt payments. So some borrowers will omit listing certain debts on their mortgage application to try to make it look like they owe less than they do.

This rarely works. For one thing, just about all established creditors—banks, credit card companies, auto lenders, medical services, etc.—are going to report your debt and payment history to the credit-reporting agencies. Your lender is going to pull your credit history when you apply for a mortgage, so it’s going to find out about it.

This is also a great reason to check your credit reports before you apply for a mortgage, too—to know what a lender will see. You can get a free credit report summary every month on Credit.com to watch for important changes, and you can get free annual credit reports from AnnualCreditReport.com.

Similarly, some borrowers may try to game the system by taking out a large loan just before the mortgage closes—perhaps by using a cash advance on a credit card—and hope it doesn’t show up in the credit-reporting system before the mortgage is closed.

However, when you sign off on a mortgage, one of the things you sign is a statement that the information you’ve provided is accurate to the best of your knowledge. If you took out a big loan the day before, the information on your application is no longer accurate—and that’s mortgage fraud.

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This article was written by  and originally published on Credit.com.

 

More from Credit.com

5 Unexpected Lessons When Buying a Home (From People Who’ve Done It Before)

5 Unexpected Lessons When Buying a Home (From People Who’ve Done It Before)

By
Rachel Stults

Five things we learned when buying a house

Ashley Walker

Around here, I’ve developed a bit of a reputation. As “Rachel the Renter” I entertain my co-workers (and you!) with a variety of renting anecdotes and horror stories. But the truth is, I do want to eventually break up with my landlord and explore a monogamous relationship with a mortgage broker. I know “Rachel the First-Time Homeowner” doesn’t have the same alliterative ring, but I’m sure we’ll all survive.

Thing is, there’s lots more at stake than just a change in status from renter to homeowner. Like so many (if not all!) first-time home buyers, I have no earthly idea what I’m doing. Sure, I can read up on all the buying and finance advice we offer here at realtor.com®. Of course, I can consult with my real estate agent and my mortgage broker. But if there’s one thing I keep hearing from those who’ve forged the path ahead of me, it’s that when you buy a home for the first time, you’re constantly faced with things you didn’t know you didn’t know.

So, before I embark, I thought I’d minimize some of those surprises and take advantage of my home-owning co-workers’ experience. They shared these personal anecdotes of surprises they encountered on the road to homeownership. I hope this will help prepare you—and me—for what lies ahead:

Mortgage meltdown

Mortgage uncertainty

Ashley Walker

5-things-learned-mortgage

“I thought our mortgage loan was approved and ready to go, but at the last minute the originating bank balked at the purchase price of our home—they thought it was too high. This was in 2008 in Silicon Valley—we thought we were getting a bargain! The bank was based somewhere in the Midwest, though. They assigned an assessor to come check it out, but fortunately the assessment supported our purchase price. It was a suspenseful few days, though.” —Cicely Wedgeworth, senior editor.

Takeaway: Don’t count on your mortgage until it’s signed. And make sure you double-check your property assessment.

Count your costs

Keep track of your mounting costs

Ashley Walker

Keep track of your mounting costs

“I might have experienced short-term memory loss during my loan approval process. All the closing costs were a mystery to me, and my loan officer or Realtor had to explain each expense every single time I saw them in updated loan docs.” —Oie Lian Yeh, copy editor

Takeaway: Go over the closing costs with your real estate agent and take notes on what to expect. You’ll see these costs itemized again and again, so best to get familiar fast.

Budget time and money for repairs

Repairs will cost you time and money

Ashley Walker

Repairs will cost you time and money

“I was surprised and worried about the problems that the home inspector found. How serious are termites? How about mold? Can these things be fixed and will the house be safe? Or will we regret buying a house with possible structural and health-related issues?

“And how much money will it cost for us to do roof repairs ourselves when the seller is selling “as-is” and it’s a competitive market where we lost out on two previous houses we bid on? Related question: How long could we put off doing roof repairs, since we were raiding our savings to fund the down payment for the house?” –Kim Moy, managing editor

Takeaway: You can’t foresee problems that might arise during the inspection. You might be able to negotiate with the sellers, but you’ll want to have enough money left over after closing for any unexpected repairs. Be prepared to walk away from your dream home if needed.

Multiple visits are OK!

Don’t be shy about visiting and revisiting the house

Ashley Walker

couple visits home for sale

“When we were buying our first house, I didn’t know I could go back to look at the house again before we placed a bid. I was also shocked that I was able to meet the sellers, which ultimately put our bid over the edge and got us the house.

“We saw the house on a Saturday and bids were due on Monday. The open house was full of potential buyers and I felt like I hadn’t spent enough time really seeingthe entire house. Our agent arranged for us to go see the house one more time on Sunday afternoon. I assumed the house would be empty, but the sellers were home and welcomed us in to take another look around.

“They were so friendly and walked us through the house, explaining little nuances along the way. We submitted our bid the next day and found out the house was ours a few days later. Our agent told us there were seven bids and ours was the same price as another couple’s, but because the sellers met and remembered me, our bid won. I firmly believe it was meant to be, but I’m glad I went back for another peek.”—Erik Gunther, senior editor

Takeaway: Look as many times as you need. This is the place you’ll call home, after all. Even in a competitive market, a second look could end up giving you the edge. (And while you certainly don’t want to harass the seller, don’t be afraid to personalize your offer with a letter describing any details about you, your family, and why you love their home. It could be enough to sway the seller in your favor.)

Learn (and love) thy neighbors

Neighbors can make or break your living situation

Ashley Walker

Neighbors can make or break your living situation

“Maybe this is a very urban issue, but I didn’t realize how neighbors can make—or break—a home. When my wife and I moved to our small co-op in Brooklyn, we knew we could get along with the three families living on the floors below us, but over the years they’ve become more than just neighbors. They’re good friends: We all had children together at about the same time, so our kids have grown up together, we babysit for one another, and we regularly get together for barbecues in our common space.

It’s what people always say about “community”—you really do want to be in a place that not only welcomes but embraces you, that you look forward to being a part of. Maybe I was just a cynical New Yorker before my wife and I bought this place, dismissive of the idea of community in a city where people cherish their anonymity, but once it happens, you realize how good it is. If I’m ever foolish enough to move away from here, I’ll definitely consider my potential neighbors on equal (or greater!) footing with the bathroom fixtures and the price per square foot.” —Matt Gross, former editorial director

Takeaway: Your community is often as important as the home you’re living in. Take a good look at the neighborhood, and don’t be afraid to ask the neighbors questions. These people could become your babysitters, your carpool buddies, and your closest friends over the years.

Think Energy-Efficient Features Save You Money? Think Again, Study Says

Think Energy-Efficient Features Save You Money? Think Again, Study Says

By
Chrystal Caruthers

energy-efficient

photo: Tuomas Kujansuu/iStock
graphic: Greg Chow

Going green at home usually comes with a hefty price tag—new windows, a geothermal heating system, and Energy Star appliances cost thousands. Most homeowners justify the cost by factoring in potential monthly savings on their utility bills.

But according to a surprising new study by the Energy Policy Institute at the University of Chicago, those savings might be overblown. Its conclusion: The initial costs of retrofitting a house with energy-efficient features far outweigh the eventual savings.

Wait…What?!

The study evaluated a sample of 30,000 low-income Michigan households that participated in the nation’s largest residential energy efficiency program. Each household was  given about $5,100 worth of energy-efficient improvements—new furnace, attic and wall insulation, and weatherstripping. Over the lifetime of the upgrades, the researchers found that the homeowners saved an average of only $2,400. That’s half the cost of the renovations, and less than half of the projected energy savings.

While the researchers did find that the homeowners saved about 10% to 20% each month on their energy bills, they decided that the savings did not justify the cost.

But the report stops short of telling consumers to ditch the idea of energy-saving refurbishments entirely.

Here’s what the researchers didn’t delve into: whether or not the upgrades were installed properly, whether the upgrades were installed all at once or over a period of years, or even whether there was any sprucing up beyond the furnace and insulation. Most Realtors® with the National Association of Realtors® Green Designation (and I once was one) know that it takes several levels of energy efficiency retrofits to make a substantial difference. Old appliances would need to be swapped out with Energy Star models. Single-pane windows would need to be replaced with double-pane low-emissivity windows, preferably with an argon core. Rooftops would need to be silver-coated, and insulated doors would need to be installed at every entry. And that’s just for starters if you want to get really serious.

Brian Wheeler, spokesman for Consumers Energy, a Michigan utility company, disagrees with the study’s findings.

“It is not an accurate reflection of the energy efficiency work we do,” he said. “Since 2009, we’ve helped Michigan homeowners and businesses save over $850 million in energy costs. That’s a significant difference.”

The folks at the Energy Policy Institute did not return repeated requests for an interview. But in a prepared statement, Michael Greenstone, the group’s director, said, “Energy efficiency investments hold great potential as a means to fight climate change. However … the projected savings overestimate the reality on the ground.”

But in reality, a low-income family that pays about $2,000 a year in utility bills would probably welcome a 20% savings. Maybe to the economists conducting the study that’s an insignificant amount of money. But in the real world, that’s $400 that a family could use to buy food, pay down debt, or go to the dentist. Reality check!