Misstating income was pervasive back then, the Great Recession is proof. With lenders required to evaluate a borrower’s ability to repay his/her mortgage, income remains relevant to qualify for a mortgage. This is especially true for stated income loans whose approval primarily hinges on the borrower’s income.
Despite regulations, fraud is still present even in today’s revamped stated income loans. There is the case of false stated income when a borrower “innocently lies” about his/her income to qualify for this kind of mortgage and/or a higher loan amount at that.
Find out why it’s never a good idea to lie about your qualifications that might result in loan denial and how lenders protect themselves from this kind of mortgage fraud.
Overstating Income Is Always a No-no
According to a Federal Reserve study, U.S. median family income rose 10% between 2013 and 2016.
Generally speaking, mortgage borrowers complete a Uniform Residential Loan Application, specifically Form 65 for those who want to get in the stated income program as per Freddie Mac that purchases mortgages including stated income loans in the secondary market.
Income, employment, and assets are checked in the normal course of making loans. Still, there are instances when some of this self-reported information is not verified.
For instance, Freddie Mac notes that the borrower’s employment or his/her source of income is the only item validated by a lender as it relates to income.
Self-employment income is generally harder to verify in itself because of certain expenses that get written off. But employment income can be overstated using fake Form W2s or by declaring additional sources without proper documentation.
Against this backdrop, it is possible for borrower-reported information, erroneous at that, to go unchecked. While one might be able to get away from lying on the loan application, the act is punishable by law.
How Lenders Deal With False Stated Income
In Freddie Mac’s best practices combatting false stated income fraud, it recommends that lenders let their most seasoned loan officers handle stated income loans.
The government-sponsored enterprise encourages lenders to compare the borrower’s characteristics, e.g. age, employment position, education and experience vis-a-vis the income declared on his/her application.
Lenders might also have to look into how the borrower accumulated his/her assets. More importantly, how does the stated income loan figure into his/her monthly debt obligations.
If a salaried employee wishes to qualify for a stated income from an additional income source that is not documented, he/she must be able to specify in the application form which parts of his/her income are from this additional source.
A borrower who can’t qualify based on traditional income documentation such as W-2s and paystubs may not be eligible for a stated income loan.
Similarly, a non-qualifying spouse’s income must not be added to the borrower’s income for mortgage qualification purposes.
Lying about your income is risky for you and the lender because you might not be able to repay your loan later on. More than loan denial, you could face legal consequences if caught.