Applying for a Mortgage? Don’t Fudge Your Income
You might lie about your weight when it's time to renew your driver's license. You might lie to your doctor about how many doughnuts you eat each week. But when it's time to apply for a mortgage loan? That's when honesty really is the best policy.
It can be tempting to lie about your income and debts when you first speak with a mortgage loan officer. But resist. Telling a loan officer that you make $1,500 a week when you really earn just $1,200 might seem like a small untruth. But this lie won't help you qualify for a larger mortgage loan, and it might undermine your relationship with your loan officer.
Mortgage lenders will verify your income through such documents as tax returns and paycheck stubs. Your loan officer, then, will discover your lie quickly. You'll feel foolish. You'll anger your loan officer. And you won't have gained access to increased mortgage dollars while doing so.
Rick Bettencourt, branch manager with Danvers, Mass.-based Mortgage Network, says that borrowers are simply adding unnecessary complications when they're not truthful about how much money they earn.
"It's vital for borrowers to be honest right from the start," Bettencourt said. "We want to work with borrowers to find them the right mortgage loan. But it's like that old adage: Crap in, crap out. If you give us bad info up front, we will find out. Three weeks or one week into the process we'll see your income documents. We'll see that your income really is lower. It makes for a non-enjoyable experience."
It's easy to see why borrowers might be tempted to lie about their income. Most mortgage lenders today want borrowers' monthly debts -- including their estimated new mortgage payments -- to equal no more than 43 percent of their gross monthly incomes. Borrowers whose income and debt levels are out of whack might lie about how much they earn as a way to falsely boost their debt-to-income levels.
Other borrowers might want to qualify for a larger home loan. Claiming more income than they actually earn might seem like a way to nab those extra mortgage dollars.
The good news is that a smaller percentage of borrowers lied about their incomes on mortgage applications in the second quarter of 2014, according to a mortgage-fraud report released by CoreLogic. According to the report, the number of mortgage applications in which borrowers lied about their incomes dropped 4 percent in the second quarter of this year when compared to the same quarter in 2013.
Borrowers would do well to continue this trend. Borrowers who lie on their mortgage applications cause unnecessary delays in the mortgage-lending process. Once their lenders, after requesting these borrowers' income-tax returns and paycheck stubs, discover the incorrect income information, they'll have to correct the mistake. This can slow the underwriting process.
It's easier to be honest from the beginning. This way, your lender, armed with your correct income information, can help you qualify for a mortgage loan for which you can honestly qualify. Using an online tool like a mortgage income calculator can help you take into account all your earnings and debt payments so you can come into the process knowing just where you stand.
And even if you were able to slip your financial lie past your loan officer, what good would it do? You'd simply end up with more expensive monthly mortgage payments that you probably won't be able to afford. Stretching to get into a house that's out of your budget is not a good financial move.
Mistakes are made
Sometimes borrowers aren't lying when they provide incorrect income information. They might instead be confused, Bettencourt says.
Bettencourt says that he has worked with some borrowers who don't understand how much they make each year. Others mistakenly count bonuses and overtime pay as part of their base pay, even though this extra income isn't guaranteed each year.
Still others when filling out their loan applications write down how much they expect to make in the next month or year, after an expected promotion or raise. This is not the income information, though, that loan officers want to see.
"It's not about the future," Bettencourt said. "It's about what the income is now and what it has been in the past. We need to quantify the borrower's ability to repay. It's why we need that two-year history, to show how stable borrowers' incomes are."
Borrowers, after filling out their mortgage applications, will have to provide at least their last two years of tax returns. And they can't pick and choose any two years. It has to be the most recent. This prevents borrowers and loan officers from selecting the best income-producing years of borrowers to make their incomes look more stable than they actually are.
Of course, making an income mistake on a mortgage application is different from actually falsifying documents to make it look as if you've earned more money in the last two years. Doing that would qualify as mortgage fraud. And you don't want to commit mortgage fraud. That can lead to serious financial penalties and even jail time.