Things to avoid when applying for a mortgage
There are all sorts of stories out there about predatory lenders being sued for fraud against homebuyers. On the other side of the coin, however, a study by CoreLogic found that fraud by mortgage applicants is also rising.
According to the study, approximately 0.92 percent of all mortgage applications during the second quarter of 2018 included fraudulent elements, more than in the second quarter of 2017, when an estimated 0.82 percent of applications did.
Even a small statement on your application that simply isn’t true could land you in big legal trouble. The federal crime of mortgage fraud brings with it a possible punishment of up to 30 years in prison, a fine of up to $1 million or a combination of the two.
The good news is you can easily avoid mortgage fraud. Here are five ways to protect yourself:
Don’t keep secret any deal you make with the seller.
In some cases, when the list price of a home is higher than the buyer wants to pay, sellers find ways to make a deal on the side. Possible incentives include paying some portion of the down payment, closing costs or repairs needed.
These deals are sometimes allowed, but the lender must be informed about them. When the lender isn’t told, the applicant could be accused of mortgage fraud. That’s because the deal essentially would put the lender unknowingly in the position of financing an amount greater than the home’s purchase price.
Don’t inflate your income.
Imagine the home of your dreams comes with a price that’s steeper than you can afford. You might think it’s no big deal to up your income on your application in the hopes of qualifying for a bigger loan. If you’re an independent contractor or small business owner, you might assume you can boost your numbers without anyone realizing.
In fact, the CoreLogic study found that this type of mortgage fraud, known as income fraud, was the most common type in loan applications for new homes, with 22 percent of applicants misrepresenting their income in applications reviewed between 2017 and 2018.
You don’t want to be a part of that statistic. Lenders compare your application against your tax return. If they find a discrepancy, you’ll have two problems. You won’t get the loan, and you could be accused of income fraud.
Don’t borrow money for your down payment and label it as a gift.
It’s allowed, and certainly not uncommon, for a family member to help pay for your down payment. But that can only be done if it’s truly a gift, and not a loan you’re expected to pay back.
Such a scenario is considered fraud because it would let you increase your down payment without increasing your debt-to-income ratio.
Don’t take a silent second mortgage.
A silent second mortgage is a second mortgage taken against an asset in order to get enough money for a down payment. It’s considered “silent” because the buyer keeps it a secret from the lender of the first mortgage. Doing this can get you into big trouble because your lender can track the sources of your down payment funds.
Don’t pretend the house you’re buying will be rental property.
On your loan application, you must be honest about whether it’s your primary residence or rental property. If you plan to rent out the property, you must note it on your application. Otherwise, you could be guilty of occupancy fraud.
Although it might seem that all loans are the same, the issue is that it’s more common to default on a rental property than your primary residence, which is a consideration for mortgage lenders. As a result, loans for primary homes typically offer better terms and rates.
However, it’s simply not worth exposing yourself to the possible consequences of lying, which include the lender raising your interest rate, forcing you to pay off your full loan amount right away, or potentially foreclosing on your property.
Where one-third of millennials get the money for a down payment
It’s no secret that the housing market is competitive, especially in big metropolitan areas. Winning a bidding war for the home you want can mean making a bid above the asking price, too.
Where do young, millennial homeowners find the money for a down payment? According to a recent Bank of the West survey of more than 600 adults ages 21-34, one-third of homeowners either withdrew from or took a loan against their retirement savings. The study also found that one in five millennials plan to do the same when they buy their first home.
Borrowing or withdrawing money from your IRA or 401(k) is allowed, but it’s not the wisest choice because the reduction in retirement savings isn’t the easiest thing to make up.
Here are the rules. According to federal law, a first-time homebuyer can take up to $10,000 out of a Roth IRA without penalty, if he or she is under 59 and a half years old and has had the account for at least five years. There are no additional fees, because the owner of the account has already paid taxes on the funds.
A first-time buyer who has had a Roth IRA for less than five years can still take up to $10,000 out of the account, but has to pay income taxes on the withdrawal.
With a 401(k), it’s advisable to borrow from the account, instead of withdrawing from it. You can take out up to 50 percent of the total amount in your account or $50,000, whichever is less. A loan means you don’t have to pay income taxes on the money and there is no withdrawal penalty, unless you don’t pay back the loan on time.
The issue here is that you likely have to keep your job to maintain the terms of the loan. If you leave your company, you generally have to pay the loan back within 60 days.
It’s important to think carefully before you dip into your retirement savings to buy a house and end up in over your head.
Bias continues even with online mortgage lenders
It would seem that online mortgage lending would reduce discrimination against minorities, but a new study from University of California, Berkeley, found otherwise.
The study showed that both in-person and online lenders charge black and Latino buyers higher interest rates. People of color and other minorities end up with up to half a billion dollars more in interest than white home buyers, the study found.
The surprising thing is that it’s the technology itself that’s causing the bias. The authors of the study said that one of the main reasons for the discrimination is “algorithmic strategic pricing.” That is what they are calling lenders’ use of technology to select potential borrowers based on where they live and based on their resources to “shop around” and compare mortgages.
Essentially, though online lenders might not be intending to create bias against minorities, using certain criteria in defining their pricing might be inadvertently targeting minorities for less favorable rates.
We welcome your referrals
We value all our clients. And while we’re a busy firm, we welcome all referrals. If you refer someone to us, we promise to answer their questions and provide them with first-rate, attentive service. And if you’ve already referred someone to our firm, thank you!
Rise in home prices slowing down
The most recent data on home prices in 20 U.S. cities showed the slowest rise in four years, according to the S&P CoreLogic Case-Shiller index of property values.
The data for the 20 cities covers eight months in row as of November 2018. The index increased 4.7 percent year over year. In the prior month, the rise in prices over the prior 12-month period was 5 percent.
Despite the slowdown in the rise, all 20 cities in the index had increases year-over-year. The highest increases were 12 percent in Las Vegas and 8.1 percent in Phoenix.
The weakest gains were in Washington, Chicago, and San Diego, and New York had a rather small increase of 3.5 percent.
Based on the national index, the rise in home prices also slowed to 5.2 percent.
The seasonally adjusted 20-city index rose only 0.3 percent over the prior month, below the 0.4 percent median estimate. In Cleveland, San Francisco and Seattle, prices fell from the prior month on a seasonally adjusted basis.
Overall, the data demonstrates that the housing market is slowing down. Sales slowed as mortgage rates increased and the gain in home prices outpaced wage growth.
That said, more prospective buyers might move forward in the coming months, with price gains slowing down and mortgage rates falling, as well as a bigger supply of homes on the market. Early 2019 data shows that applications for loans to buy homes are rising.
When your neighbor’s vacation rental becomes a problem
Your neighbors are using their home as a vacation rental. That means you “enjoy” a steady stream of rotating people moving in and out next door. These short-term guests like to stay up late, party in the backyard, and play loud music. What can you do?
Talk it over
As with any dispute, begin by having a conversation with the property owner. They may not be aware their guests are regularly being disruptive. Offer to help monitor guest behavior and suggest an update to their house rules.
File a complaint
Vacation rental platforms, such as Airbnb and VBRO/HomeAway, have processes in place so that neighbors can report problems. If you know your neighbor is using one of these platforms, search for the complaint section of the website. Of course, you can report noise violations and nuisance violations to the appropriate authorities.
Check local regulations
Some municipalities have regulations in place to prohibit short-term rentals, limit the number in a single neighborhood, or limit the number of days a property can be rented in such a way. Investigate your local ordinances.
You can hire an attorney to determine if any restrictions prohibit your neighbors from using their property as a short-term rental. A legal advisor can help you evaluate your options and take the appropriate steps to resolve the problem.