Being an open book is a great quality to exhibit toyour BFF or significant other (well, usually), but it can get you into hot water with your lender when you’re trying to buy a home. Now, let’s be clear: We are not advocating in any way, shape, or form that you lie to your lender or withhold pertinent information when you’regetting a mortgage.
But there are some topics that you just don’t need to bring up, because they wave unnecessary red flags that can lead to lots of extra paperwork and raise questions about whether you can really afford that mortgage. Just askCheryll LeBlanc, a loan officer at Fairway Independent Mortgage Corp. in Holden, MA, who weighed in on some doozies she’s heard over the years.
“When I hear statements like (these), it makes me pause, kind of turn my head sideways, and say ‘Hmmm…’” she says.
Here are some crazy things would-be home buyers have said to lenders, and why they’re cause for concern.
1. ‘I need to get an extra insurance quote due to … (fill in the blank)’:
- Crime rates in the area
- Potential flooding
- Earthquake zone
Asking questions about insurance could indicate the house is in ahigh-risk zone, and we “now have to underwrite the borrower and the property with a different and more intense default lens,” says Bill Dallas, CEO and co-founder of Cloudvirga. If your home is in a designated flood hazard area, flood insurance is mandated by the Federal Emergency Management Agency. Otherwise, it might well be a good idea, but you don’t have to mention it.
2. ‘I can’t believe how much work the house needs before we move in’
Have you ever seen a home inspection report?It’s a stack of 20 to 50 pages containingevery little nuance that needs to be fixed in a home. It’s crucial information for you, but you’ll want to hold off on mentioning the contents of it to your lender.
“When lenders see a home inspection report, they freak out and begin to ask for a lot of conditions to make sure these issues won’t grow into bigger problems and halt borrower payments,” Dallas says.
Best-case scenario: The lender willask for a lot of information. The worst case is itwill ask for a lot of money to be escrowed to make the repairs.
“Avoid any mention of what your inspector found,” Dallas says. “The appraisal comments create enough challenges.”
3. ‘Please don’t tell my spouse what’s on my credit report’
First off, this makes lenders cringe because they’re wondering just how much debt you have, LeBlanc notes. Or what else you’re trying to hide.
But, the bottom line, she says, is that it’s all going to be revealed on an application.
“I’ve been in face-to-face appointments with clients and when I pulled their credit—one of the parties is crying as the extent of debt is coming out,” she says.
She advises couples make sure both parties are clear on each other’s debts and that they get the animosity out before sitting down for a pre-qualification or pre-approval.
4. ‘I’m still working out the details on my down payment’
“Lenders like to see that borrowers have ‘skin in the game,’ so the down payment source is critical,” Dallas says.
Any borrowed funds, gift funds, and increasesin CLTV, or combined loan to value ratio, mean there’s an increase in the chances of default, he says.
“Fraud is the biggest risk in lending, and down payment fraud is the second-highest kind, after income fraud,” he notes.
Down payment fraud could comprise a number of things: Perhaps the borrowersays it’s a gift but itactually has to be repaid, or the borrower got a loan to pay for it (which is a no-no). Or perhaps the buyerborrows the down payment from the seller and does a silent second mortgage to pay it back.
That’s why lenders willrequest a paper trail for any gifted funds.
If you do plan to use a gift for your down payment, the donor must be an immediate family member, must provide copies of bank statements confirming the donor hasthe capacity to gift the funds, and must sign a letter that states the money is a gift, not a loan.
5. ‘I can’t wait to use the hot tub I’m buying on the side from the seller’
If the hot tub comes with the house and it’s written into the contract, then you’re in the clear. But if you’ve negotiated for something on the side with the seller, you’ll be in hot water—and we’re not talking about the kind with bubbles.
“Buyers have to sign a document at the closing, which states that no money has exchanged hands between the buyer and seller outside the closing,” says Lauren LoMonaco, managing partner of Chicago law firm LoMonaco& LoMonaco.
If you mention a side deal to your lender, it’s going to raise major red flags. But don’t withhold the info, either—if you do and you’re found out, you could be charged with mortgage fraud, and that’s a felony. So whether it’s a lawn mower, flat-screen TV, or that sweet hot tub out back, make sure you disclose it in the contract.
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