Mortgage fraud takes on many forms and schemes. For some buyers, fudging the numbers on their income or employment history to appear more creditworthy seems like a harmless thing, since they intend on paying their mortgages on time. For lenders, however, too many inconsistencies or discrepancies could draw a red flag on a mortgage application. Understanding how lenders check for fraud and how an application gets flagged will allow you to avoid common pitfalls.
A few of the methods lenders use to check for fraud include reviewing tax returns, talking with current and previous employers and looking at the applicant's bank statements.
What Borrowers Lie About
Industry experts refer to two types of mortgage fraud: fraud for housing and fraud for profit. Borrowers are commonly guilty of committing fraud for housing. They have every intention of paying their mortgage, but want to qualify for the loan whether they can afford it or not. Borrowers lie about their assets, income, liabilities and debts they owe, length of time they've been employed and even their identity. Borrowers also lie about occupying the property when they really intend on renting it out from the start.
How Lender Verify What Borrowers Say
Lenders use a variety of measures to verify borrower claims. For example, lenders can verify income by checking with present and prior employers, reviewing W-2 statements and comparing them with the income reported on the borrower's tax returns. Additionally, the lender may use several online resources and databases to verify average salary ranges for different professions to determine if you're overstating your income.
Lenders also can verify company data for a self-employed applicant by using business registries and online databases. The lender also uses documents the borrower provides to verify the money he has in his savings and checking accounts, to establish a pattern of spending and determine how seasoned his funds are.
Using A Borrower's Tax Returns
Tax returns provide an extra vehicle for the lender to verify a borrower's income and find discrepancies or instances where income is overstated, whether intentionally or not. A borrower, for example, may unintentionally overstate income from a rental property. Rental income that does not appear on the borrower's returns can't be counted as income for the purpose of a loan. The lender may only count the net cash flow of the rental income and not the potion of it that goes towards operating costs.
Business losses are another area the lender will review on a self-employed applicant's tax returns. Although the borrower may not intentionally commit fraud, the lender's goal is to find areas of overstated income that could result in a loan default in the future.
Dotting The "I's" and Crossing the "T's"
In general, the lender will look for red flags on physical documents the borrower provides in a variety of ways. Checking for different fonts on the same document and looking for mismatched signatures or handwriting or strange logos are just a few ways the lender can manually find areas of potential fraud through altered documents. Additionally, the lender may review the addresses of employers or the self employed applicant's business address to verify they exist and have a physical location, not just a post office box address.
Verbal Lender Audits
Perhaps the simplest way lenders check for fraud is verbally calling an applicant to verify key points on the mortgage application such as the loan amount, the applicant's home and mailing address and his stated income. While this helps the lender track fraudulent activity by the borrower, it also helps the lender catch industry professionals who mislead or misrepresent the borrower by making changes to the application before it is submitted for underwriting.
- Brand X Pictures/Brand X Pictures/Getty Images