Loan Fraud - A Cautionary Tale for Buyers, Sellers and Realtors1/22/2020
If you have recently gotten a mortgage, your lender asked you to sign a form authorizing them to pull your original tax return in case of an audit. Unfortunately, there have been instances in the past when either a borrower or their loan officer falsified numbers on a tax return which was later caught during an audit.
It is hard for most of us to believe that someone would commit such blatant fraud. What we don’t realize is that almost every day, there are opportunities for buyers, loan officers or Realtors to commit fraud without intention and without knowing it.
Basically, problems happen when there are terms in the contract that are not shared with the lender and/or the underwriter. For example: Let’s say the seller has offered to give the buyer a $2,000 carpet allowance. At closing, the seller hands the buyer cash or a personal check for the $2,000. Payments that go from one party to another without the lender's consent are a violation of real estate escrow laws. The buyer's mortgage lender is entitled to know all the financial details as the loan approval is based upon those details.
In this example, it is very probable that none of the parties intended to commit fraud. The Realtor doesn’t think of carpet as having to do with the loan, the loan officer doesn’t want to “muddy things up” with extraneous details, and the buyer has no idea what the underwriter requires.
Another example would be if the buyer financed only 80% of the property’s value from the lender and the seller accepted the proceeds as full payment but collected the remaining 20% from the buyer with an “undisclosed seller second mortgage”.
Both buyer and seller are asked to sign an affidavit at closing stating that all terms of the sale are included in the statements and that there are no undisclosed agreements. Parties that sign this document but proceed to transfer money outside of the closing run the risk of committing fraud.
What to watch for?
Be aware if any party to the transactions directs you not to share certain documents with your lender. While this is not always wrong, you want to be sure you understand why the document is being withheld. If furniture or appliances are included in the sale, but the buyer isn’t paying any more for the house to get them, the lender would prefer that the personal property be addressed on a separate addendum. Lenders prefer the loan cover only the real estate. Also, agreements between the buyer or seller and their agent may not require disclosure to the lender as long as they don’t affect the actual terms of the sale between buyer and seller or the buyer’s costs.
Boiling it down to basics: Lenders use the buyer’s income, their debt-to-income ratio, the property’s value and the buyer’s cash investment to approve or deny the loan. Any agreements between parties related to the transaction that might change these factors should be disclosed to the lender and the underwriter to avoid loan fraud.
If you have any questions, contact your favorite RE/MAX Perrett agent today and don’t worry, we’ve done this a million times!