Over the past couple of years, we’ve seen the real estate market change quite a bit. It has gone from bad to worse, but has rebounded quite nicely in recent years. Home prices are up, multiple bids are reality again and the industry has changed in many others ways, as well, including fraud.
Mortgage fraud is down over 5% this year, according to CoreLogic MarketPulse. Another interesting part of this report is the tendency fraud is taking. It has turned into more of an income-based fraud, which changes the ability to repay the mortgage, in the eyes of the lender.
Due to the collapse, new legislation was put in place making it a law that sub-prime lenders have to verify the ability of an applicant to repay the loan, if the loan is through Fannie Mae, FHA, VA or Freddie Mac. This is due to a huge issue that factored into the collapse, which were stated income loans.
Stated income loans were originally designed to give the small business owner the ability to get a mortgage based on their credit and the income they said they made. However, with the sales pressure account executives faced and consumers looking for any way possible to get the house they want stated income loans started to serve another purpose.
When a borrower was unable to obtain a mortgage, due to their income, account executives could use the stated income program to get them approved. The problem with this, it doesn’t allow mortgage companies to turn down a loan a borrower cannot afford.
Another issue that contributed to the collapse was the high debt-to-income ratios used to approve mortgage. In January, a new debt-to-income ratio will go into effect dropping the current ceiling from 55% to 43%. This will make it harder for borrowers to get approved for mortgages they cannot afford.
The bottom line, if you lie about your income and use a stated income mortgage, it can hurt you in the long run. Basically, you will run the risk of being approved for a mortgage you cannot afford.