In the second post in a three-part series about deciphering mortgages, Coldwell Banker Real Estate Market Specialist Les Christie explains how to pick a mortgage rate and term that suits your financial needs.
Choosing the right mortgage rate can be difficult. There are many different options, and what’s the best choice for one person may not be for another. When borrowers begin the mortgage process, they first need to develop an understanding of mortgage rates. Then, the challenge becomes identifying what type of mortgage meets their individual needs. Here are two questions every home buyer should ask themselves when choosing a mortgage rate:
Do I want a fixed rate or adjustable rate mortgage (ARM)?
Borrowers have a choice of two types of loans, fixed rate or adjustable. In short, fixed rates mean the monthly payments never change. ARMs offer fixed rate terms for, usually, five or seven years followed by rates that can change once a year after that.
“I’m a big fan of fixed rate mortgages,” said Greg McBride, chief financial analyst for Bankrate.com, a leading mortgage loan information site. “For home buyers, it’s the best gauge of affordability. If you can’t afford a home with interest rates at below 4%, you can’t afford a home.”
ARMs are cheaper initially: At recent interest rates, the monthly payment for an ARM would save about $60 a month on a 30-year fixed with a $200,000 principal. But for many borrowers, that may not be enough savings to offset the uncertainty of potential adjustments.
For others, however, adjustable rate loans can make sense, according to Keith Gumbinger of HSH.com, a mortgage information provider. “ARMs work well with short-term forms of ownership,” he said. “If you think you’ll be there only five or six years, ARMs will save you money.”
Other candidates for ARMs are households whose incomes are likely to rise, such as a one-income household with a partner who plans to return to the work force in a couple of years. They could opt for a more affordable payment during the lean times, knowing that, when their costs rise, they’ll be in a better financial position to afford the higher payments.
If I have a fixed rate mortgage, should I choose a 30-year or 15-year?
The shorter the term of the fixed rate mortgage, the lower the interest rate, but the higher the monthly payments. On a $200,000 loan, a 15-year fixed at current rates will cost about $1,376 a month, $460 more than the payments on a 30-year mortgage.
Of course, the loan will be paid off in half the time, saving borrowers more than $80,000 in interest over the full course of the mortgage.
According to McBride, borrowers should opt for 15-years only when they can afford to do so without harming their other financial goals.
“Handcuffing yourself to higher monthly payments is bad if it prevents you from investing in tax-advantaged retirement accounts or if you’re unable to set aside enough cash in an emergency fund,” he said.
If you can’t max out your 401(k) payments because your mortgage payments are too steep, you’ll end up costing yourself a lot of money in the long run.
But if you’re convinced that you have enough income and savings, then go for the 15-year. You may be the first one on your block to be mortgage-free.
In our third and last installment of this series, we’ll look at other money-saving tips and tricks that could help you shave down the cost of your mortgage or even get ahead on a few payments. Stay tuned!
Choosing the right mortgage can be challenging, but it’s really only the first of many hurdles on your trajectory to owning your home. Once you’ve locked your mortgage in, you then have to decide how to pay it off in the most efficient manner – without spreading yourself too thin. Here are some things to consider and best practices to follow.
Points: To Pay or Not to Pay?
When comparing interest rates from different lenders, don’t forget about points. These upfront payments are a percentage of the mortgage principal — one point is 1% ($2,000 on a $200,000 loan) — and are a way to reduce interest rates over the entire life of the loan.
“You’re prepaying interest,” said Greg McBride, chief financial analyst for Bankrate.com. “And, the longer you can stay in a home, the more sense it makes.”
Paying one point will usually lower your interest rate an eighth to three-eighths of a percentage point, according to Keith Gumbinger of HSH.com, a mortgage information provider. Instead of a 4% rate, for example, buyers get 3.875% to 3.625% loans. That saves about $15 a month at 3.875% and $44 at 3.75% on $200,000 in principal. At $15 a month, it takes about 11 years to offset the upfront cost. At $44 a month, it takes less than four years, so borrowers should make sure they shop for the best deal for the points they pay.
Only pay points if you have excess cash, advises McBride. Otherwise stash the money in an emergency fund.
But if you are confident that you already have enough savings for a rainy day, and you plan to spend a long time living in the home, pay the points, said Gumbinger. “It saves you money over the long haul.”
Making Extra Payments
Borrowers always retain the option of making extra payments any time over the term of the loan. For that reason, some borrowers may opt for a 30-year mortgage even when they think they can afford a 15-year. They can make extra payments as an occasional or one-time event, or on a regular basis, but when money is tight, they can suspend them.
Making extra payments can shorten a mortgage term dramatically and save tens of thousands of dollars in interest. On a $200,000 loan at 3.65%, adding a $1,000 payment once a year can lop four years off your payments, saving nearly $20,000. When interest rates are higher, the impact is even greater.
McBride cautions, however, to only pay out surplus cash. Once it’s sent to the mortgage lender, it’s hard to access that money again.
It’s important to remember that just because you’ve locked in a particular mortgage, you still have the flexibility to pay it off sooner if you can. Making extra payments and paying points can save you a lot of money in the long run.
Is it really 2016 already? For those of you who happen to be planning on buying a home in the new year—or even just trying to—there’s a whole lot to celebrate. Why? A variety of financial vectors have dovetailed to make this the perfect storm for home buyers to get out there and make an (winning) offer. Here are six home-buying reasons to be thankful while ringing in the new year:
Reason No. 1: Interest rates are still at record lows
“Remember 18.5% in the ’80s?” asks Tom Postilio, a real estate broker with Douglas Elliman Real Estate and a star of HGTV’s “Selling New York.”“It is likely that we’ll never see interest rates this low again. So while prices are high in some markets, the savings in interest payments could easily amount to hundreds of thousands of dollars over the life of the mortgage.”
“In most metropolitan cities, monthly rent is comparable to that of a monthly mortgage payment, sometimes more,” says Heather Garriock, mortgage agent for The Mortgage Group. “Doesn’t it make more sense to put those monthly chunks of money into your own appreciating asset rather than handing it over to your landlord and saying goodbye to it forever?”
Reason No. 3: Home prices are stabilizing
For the first time in years, prices that have been climbing steadily upward are stabilizing, restoring a level playing field that helps buyers drive a harder bargain with sellers, even in heated markets.
“Local markets vary, but generally we are experiencing a cooling period,” says Postilio. “At this moment, buyers have the opportunity to capitalize on this.”
Reason No. 4: Down payments don’t need to break the bank
Probably the biggest obstacle that prevents renters from becoming homeowners is pulling together a down payment. But today, that chunk of change can be smaller, thanks to a variety of programs to help home buyers. For instance, the new Fannie Mae and Freddie Mac Home Possible Advantage Program allows for a 3% down payment for credit scores as low as 620.
Reason No. 5: Mortgage insurance is a deal, too
If you do decide to put less than 20% down on a home, you are then required to have mortgage insurance (basically in case you default). A workaround to handle this, however, is to take out a loan from the Federal Housing Administration—a government mortgage insurer that backs loans with down payments as low as 3.5% and credit scores as low as 580. The fees are way down from 1.35% to 0.85% of the mortgage balance, meaning your monthly mortgage total will be significantly lower if you fund it this way. In fact, the FHA predicts this 37% annual premium cut will bring 250,000 first-time buyers into the market. Why not be one of them?
Reason No. 6: You’ll reap major tax breaks
Tax laws continue to favor homeowners, so you’re not just buying a place to live—you’re getting a tax break! The biggest one is that unless your home loan is more than $1 million, you can deduct all the monthly interest you are paying on that loan. Homeowners may also deduct certain home-related expenses and home property taxes.
Resolve to Give Up These 8 Money Wasters for a Down Payment Before 2017
The presents are unwrapped, the holiday decorations are packed up (or not, we won’t tell), and the ball has dropped on the end of 2015. It’s time to make some New Year’s resolutions—homeowner-style.
You can make 2016 the year of the down payment. Really.
By cutting a few things from your budget this year, you can speed up your progress toward having a down payment by the time those holiday decorations come back out of the closet. You probably knew these were splurges eating up your discretionary income, but did you know just how much? Don’t worry—we’ll do the painful math for you so you know what to kick to the curb in 2016.
1. Skip the latte
Annual savings: $876 (plus taxes!)
A medium latte at Starbucks costs $3.65. If you stop by every day before work, that adds up So, suffer through the free coffee at work and think instead of the new kitchen where you can create your own coffee bar.
2. Cut the gym membership
Annual savings: $696
The average monthly cost of a gym membership is $58 a month, or $696 a year, and that’s assuming you’re already a member and not paying sign-up fees as well. Not to mention that most of our good intentions taper off sometime in February and we end up paying for something we’re not even using.
We’re not telling you to stop exercising. But try getting creative with your routine instead. Enjoy the great outdoors! Walk on your lunch break! Ride your bike! You’ll bag a surprising amount of cash toward your down payment.
3. Cancel the cable
Annual savings: $1,189
Cable gets more expensive every year. In 2015, cable customers paid an average of $99.10 a month, or $1,189.20 for the year, according to theLeichtman Research Group. If you drop the cable in favor of, say, Netflix at $7.99 per month, you’ll save $91.11 per month—or $1,093.32 for the year—and get commercial-free original shows.
4. While you’re at it, drop a streaming service
Annual savings: Nearly $100
You don’t really need to subscribe to all the streaming channels at once. If you have Netfix, Hulu, and Amazon Prime, you’re paying roughly $25 a month. If you drop Amazon Prime, you could save $99 a year. If you drop Hulu or Netflix, you could save $95.88 a year. Tip: Hulu allows you to put your subscription on hold. So if you find yourself having less time for binge-watching, try suspending your Hulu account until you have more time for it and save yourself that dough.
5. Lower your mega smartphone plan
Annual savings: Up to $300
Did you get one of those unlimited everything plans when you bought your phone and never changed it—even after you realized you don’t talk on the phone that much and Candy Crush Saga doesn’t use much data? If you switch to a lower plan—or at least drop a couple of gigs of data—you could save $10 to $25 a month.
6. Pack a lunch instead of buying it
Annual savings: $1,714
Taking a sack lunch to work might make you feel like you’re back in elementary school, but let’s do the math on how much it saves on your lunch costs. The average daily cost for the American worker who bought lunch from a restaurant in 2015 was $11.14, according to Statista. That amount adds up to about $56 a week, or $2,674 a year. If you can make a sack lunch for $4 a day, you will spend about $20 a week, $80 a month, or $960 a year—an annual savings of about $1,714.
7. Quit drinking
Annual savings: $3,168
If you’re an avid social drinker, you may not realize how much those $10 cocktails are adding up.
Say you go out three times a week, ordering at least two cocktails at $10 each plus the standard $1 tip per drink. That adds up to $66 a week, $264 a month, and—wait for it—a whopping $3,168 a year.
8. Go to the cleaners less often
Annual savings: $1,354
Are you still taking most of your clothes to the cleaners? Costs of dry cleaning or laundering items can vary a lot. A survey by Consumers’ Checkbookdetermined the average price of laundering a men’s dress shirt was $1.87, laundering men’s khaki slacks was $5.57, and dry-cleaning a two-piece suit was $11.13. If you take in two pairs of slacks ($11.14), five shirts ($9.35), and a suit every week, you’ll pay about $31.63 a week before taxes, which can add up to about $1,645 a year. Based on those numbers, if you wash your own slacks and shirts and reduce by half the number of times you have your suit dry cleaned, you could save up to $1,354 a year.
Best of all, you won’t miss the things you cut (OK, maybe some), but you’ll rack up a truckload of money in 12 short months. In fact, drop everything from this list and you could bank nearly $9,400 by the end of the year. Take that, down payment!
You’ve found a home you love … only how are you going to pay for it? If you are like most Americans, you’ll need to get a home loan—also known as a mortgage. Paying for a home is a bit more complicated than slapping down a credit card or a pile of cash. OK, a lot more complicated. But that’s why we’re here—to guide you through those murky financial waters!
When you and the seller agree to a price, you will need to make a down payment—the lump sum in cash that you can afford to pay at the time of purchase.
Traditionally, down payments are 20% of the purchase price, so if you are buying a home for $500,000, your typical down payment would be $100,000. In some red-hot markets, buyers expect higher down payments, sometimes as much as 40%. Don’t have that much money lying around? You might have to do some searching. The days of no-cash-down mortgages are mostly a thing of the past—and for good reason (We’re looking at you, subprime mortgage crisis). You can still find mortgages that require less than a 20% investment, but be warned: You will typically pay for that privilege down the road with a higher interest rate (see more below).
Miracle of miracles, you’ve made your down payment. Yay! The rest of the money you still owe on your home is called the principal. This is what you will be paying off, monthly, over the lifetime of the mortgage, which can last anywhere from five to 30 years—usually 30.
Nothing is free, especially when you are using someone else’s money. Just like your car or college loan, you will pay back the money you borrowed from your lender (most likely a bank) with interest—a percentage of the principal that you borrowed. Right now, interest rates are hanging around 4% for 30-year, fixed-rate mortgages (more on what that means later).
If you don’t like surprises—like a sudden jump in your mortgage’s interest rate—then this type of mortgage is for you. Once you lock in your interest rate with your lender, that’s it: The rate remains fixed—your monthly payments will remain the same for the life of the mortgage. This can be good or bad, but it will always be predictable. While shopping around for the lowest rate, you will notice that interest on fixed-rate mortgages is almost always higher initially than on adjustable-rate mortgages (see below). But over the long run, avoiding the uncertainty of sudden rate hikes might be worth the peace of mind.
Adjustable-Rate Mortgage (ARM)
This type of mortgage does exactly what it says: Its interest rate will be adjusted by thelender in accordance with current interest rates, after an introductory period that could be three, five, seven or 10 years. The good news? The initial ARM interest rate is usually lower than that of a fixed-rate mortgage, and if average interest rates are low, your interest rate and the amount you pay every month will be, too. The bad news? If interest rates go up, well, so does your interest rate and payments, once the introductory period is over. While ARMs make some home buyers leery (they were involved in many of the mortgage defaults of the mid to late 2000s), there are times when it makes sense to get one. And these days, some adjustable-rate mortgages have a cap that limits how high your rate can go, reducing your risk.
If you want an ARM but want to avoid the heart attack that comes with skyrocketing interest rates, you can ask for a cap. The cap limits how high the bank can nudge up the interest rate on your loan, thus limiting your monthly payments (and blood pressure). You may pay a bit more for this privilege.
While you are negotiating the terms and conditions of your mortgage—no matter the type—lenders keep reacting to changes in the financial markets by changing interest rates. So, what looked like a reasonable rate when you submitted your loan application two days ago may no longer look like a deal you can afford. To keep a rate that you like, you will want to lock it in with the bank. A rate lock will remain in effect until closing, but only if you close by an agreed-upon deadline, typically 60 days.
Your down payment isn’t the only chunk of change you’ll need to pony up. When you arrive at the closing—the day you sign all the paperwork and the keys exchange hands—you are responsible for paying closing costs. Those are the various fees for the services and processing necessary to make your mortgage happen. So, bring your checkbook and a decent pen! You shouldn’t be blindsided by the amount of the closing costs, because within three days of receiving your loan application the lender must provide you with a three-page “loan estimate” that lays out the various fees. While you can’t avoid closing costs, there are ways to reduce them.
Points are part of those aforementioned closing costs charged by your lender, calculated as a percentage of the principal. One point equals 1% of your loan (or $3,000 on a $300,000 mortgage), two points equal 2% ($6,000), etc. As you can tell, these are the kinds of points you don’t really want to rack up. But if they can help you clinch the deal on your dream home, they are so worth it.
If you find you are in need of guidance or further explanation, please always feel free to contact me Steve! 617-372-1870
A last-minute problem with financing can quickly delay a closing on a home sale. Here are two of the most common financing problems that can surface:
Failure to disclose key financial information. One of the biggest reasons for a financial issue is the failure of the buyer to disclose key financial information, The New York Times reports. Buyers who are not forthright about their financial circumstances can face a delay. Lenders will quickly find borrowers who are behind on child support obligations or real estate taxes, for example.
Running up credit as a mortgage application is pending. Buyers may go out and purchase new furniture or a car prior to closing on a home, but doing so, could cause them a delay to the closing of their home sale. Lenders will recheck borrowers’ credit right before the closing date. If new debt obligations suddenly appear, that can be a red flag to a lender. Prior to making any large purchases prior to closing, borrowers should check with their lender, says Douglas Rotella, an executive vice president and loan originator with HomeBridge Financial Services.
In some metro markets, a delay to securing financing could mean missing out on a home. For example, in hot markets like California’s Silicon Valley, sellers may even balk at deals that are contingent on a mortgage approval, says Mia Simon, a real estate professional with Redfin’s Silicon Valley office. Nearly every home is getting multiple offers there so buyers must go beyond pre-approval and receive a loan commitment before they submit an offer, she says. The loan commitment indicates that the borrower’s paperwork has passed underwriting and the only thing necessary for final approval is the appraisal and verifying the borrower’s employment.
Thinking of Buying a Home? Ask Yourself These 3 Questions!
If you are debating purchasing a home right now, you are surely getting a lot of advice. Though your friends and family will have your best interest at heart, they may not be fully aware of your needs and what is currently happening in real estate.
Let’s look at whether or not now is actually a good time for you to buy a home.
There are 3 questions you should ask before purchasing in today’s market:
1. Why am I buying a home in the first place?
This truly is the most important question to answer. Forget the finances for a minute. Why did you even begin to consider purchasing a home? For most, the reason has nothing to do with finances.
A study by the Joint Center for Housing Studies at Harvard University reveals that the four major reasons people buy a home have nothing to do with money:
A good place to raise children and for them to get a good education
A place where you and your family feel safe
More space for you and your family
Control of that space
What non-financial benefits will you and your family derive from owning a home? The answer to that question should be the biggest reason you decide to purchase or not.
2. Where are home values headed?
When looking at future housing values, Home Price Expectation Survey provides a fair assessment. Every quarter, Pulsenomics surveys a nationwide panel of over 100 economists, real estate experts and investment & market strategists about where prices are headed over the next five years. They then average the projections of all 100+ experts into a single number.
Here is what the experts projected in the latest survey:
Home values will appreciate by 4.1% in 2015.
The cumulative appreciation will be 18.1% by 2019.
Even the experts making up the most bearish quartile of the survey still are projecting a cumulative appreciation of over 10.5% by 2019.
So what does that really mean for you and your family?
The chart below was made using the Home Price Expectation Survey’s predictions:
If the experts are right and you were to purchase a home by January 2016 for $250,000, that home would appreciate by over $34,000 over the next four years! As we have reported before, homeownership is one of the best ways to build your family’s wealth.
3. Where are mortgage interest rates headed?
A buyer must be concerned about more than just prices. The ‘long term cost’ of a home can be dramatically impacted by an increase in mortgage rates.
The Mortgage Bankers Association (MBA), the National Association of Realtors andFreddie Mac have all projected that mortgage interest rates will increase by approximately one full percentage over the next twelve months as you can see in the chart below:
Only you and your family will know for certain if now is the right time to purchase a home. Answering these questions will help you make that decision.
Homes in Foreclosure: 3 Mistakes to Avoid When Considering a Purchase
Homes in foreclosure can be an appealing option in terms of price. While there are great deals to be had, purchasing a foreclosed home isn’t for everyone. For many buyers, there is a misunderstanding about the different types of foreclosures available.
Homes in foreclosure can be an appealing option in terms of price. While there are great deals to be had, purchasing a foreclosed home isn’t for everyone. For many buyers, there is a misunderstanding about the different types of foreclosures available. Understanding the key concerns and how to overcome them, will be critical to making the best purchase possible. Here are the top three mistakes to avoid:
1. Going It Alone
One of the biggest mistakes buyers make is to consider homes in foreclosure as a do-it-yourself venture. While many home buyers can successfully work without a real estate agent to purchase a home, those who work without an agent on a foreclosure do so at their peril.
Foreclosures require specialized knowledge from an agent who can guide you through the peaks and pitfalls of the process. Conducting a search in your area for a real estate agent who specializes in these types of sales will be beneficial to you as a buyer — and help protect your interests.
A certified home inspector familiar with inspecting foreclosed homes and a real estate lawyer well-versed in the process should round out your team to ensure you are getting the best home possible for the lowest price.
2. Ignoring Hidden Costs
Focusing on the low sticker price of a foreclosed home could be risky, especially if that dollar figure is your sole deciding factor. Hidden costs can creep up even long after the sale, and create headaches — especially when there is little access to cash to remedy the situation.
It is quite common for homes in foreclosure to be riddled with physical problems due to long-term lack of maintenance, vandalism, or simply the effects of sitting empty for a period of time. Even if a buyer can conduct a home inspection prior to offer, the scope of the inspection can seriously be limited due to utilities that have been disconnected, making it difficult to assess a home’s true condition.
The best thing buyers can do is set a maximum price for offer — and stick to it. It can be tempting to get caught up in the thrill of the bid, but saving a few thousand dollars off the top can turn into tens of thousands in the long run to fix issues that were overlooked prior to offer
3. Thinking Foreclosure Always Equals Great Deal
Timing and strategy are always helpful when buying homes in foreclosure, but it is important to remember that in a saturated market, many of the homes that are available have already been passed up by investors. While this doesn’t make a foreclosed home unworthy of a bid — buyers need to be realistic in their expectations of what they will receive.
Because a foreclosed home isn’t always the most advantageous deal, getting lending pre-approval is essential in being able to complete the process. Many lenders won’t finance a purchase where the selling price is more than the assessed value of the property, so knowing where you stand before you hit the auction block is critical.
Even if you’ve found a great deal, be wary of homes still occupied by the people who defaulted on the loan. Many owners who are angry at the bank or situation end up vandalizing their home, stripping it of its contents in the process, and leaving an unwanted financial burden on the buyer.
The Bottom Line
Regardless of the risks, buyers who do their homework, employ the right professionals, and consider a home’s location, condition, and viability as a long-term investment will be able to make a foreclosed home work for them.
Nationwide rents have risen 15 percent, on average, between 2009 and 2014, according to the National Association of REALTORS®’ data. In some hot markets – like New York, San Francisco, and Seattle – rental costs have surged more than 20 percent in that timeframe. Meanwhile, renters’ incomes have grown by only 11 percent.
An increasing number of renters are spending more than 30 percent of their incomes on rent – what most financial analysts consider financially burdensome to a household. About 46 percent of renters age 25 to 34 spent more than 30 percent of their incomes on rent – an increase from 40 percent of renters 10 years earlier, according to a report by Harvard University’s Joint Center of Housing Studies. What’s more, a new analysis from Zillow shows that renters who spend more than 30 percent of their income on rent have a median savings rate of zero.
Rising rents are due to “supply constraints” in housing and rentals, says Lawrence Yun, NAR’s chief economist. Fewer rentals have led to higher prices.
Millennial renters may be particularly hard hit too, as rising rentals costs are exceeding wages and millennials are renting for longer periods of time than previous generations. The typical first-time buyer now has rented for six years prior to buying – up from 2.6 years in the early 1970s, according to an analysis from Zillow. The median first-time buyer is age 33; a generation ago the median first-time buyer was about 30 years old.
The longer rental times coupled with high rental costs are causing renters to struggle with saving for a downpayment.
“With rents taking up a larger chunk of household incomes, it’s difficult for first-time buyers – especially in high-cost areas – to save for an adequate down payment,” Yun said in a news release from an NAR study earlier this year that showed the widening gap between rental costs and household incomes.
Let’s start with the (blatantly) obvious: Getting a mortgage and buying a house involves a lot of money. And the answers you give on your mortgage application have a direct impact on how much money you’ll get approved for—or whether you’ll be able to get the loan in the first place. So it’s not surprising that some people may be tempted to fudge the facts just a bit.
After all, it’s just paperwork, and a little white lie. What can it hurt?
A lot, actually. In fact, it can make the process downright excruciating.
To begin with, the phrase “little white lies” is a bit of a misnomer as far as mortgage applications are concerned. If you’re fudging the facts in a way that affects your costs or ability to get the loan, that small untruth is likely to turn into a whopper. And since lenders verify most of the key information on your application, your chances of getting away with it aren’t very good to begin with.
What are the possible consequences? Getting turned down for the mortgage is the least of them. If your falsehood is discovered after you get the loan, your lender could boost your interest rate or even demand immediate repayment in full. Tax-related falsehoods could get you in trouble with the IRS.
In addition, penalties for mortgage fraud—which is what lying on a mortgage application is—range as high as 30 years in prison and a $1 million fine. You likely won’t face a penalty like that for a small exaggeration or omission, but you could still end up with a fine and a conviction.
The following “white lies” might seem fairly harmless but could get you into hot water once the truth comes out.
1. Who will live in the house
This is one of the most common. A person applies for a mortgage to buy a home as their primary residence when they actually plan to rent it out as an investment property. The benefit is that lenders charge higher interest rates on loans to buy investment properties than they do for a primary residence.
The borrower might think, “What difference does it make? A loan is a loan. I’m responsible for it either way.” But lenders know that default rates are higher on investment properties than they are on primary residences—people try harder to keep up the payments when their own homes are on the line—and that’s why they get lower rates than investors do. Minimum down payments are significantly larger on an investment property as well.
From the lender’s perspective, you’re stealing money from them by making them take on more risk than they agreed to. And risk costs money.
And don’t assume your lender won’t find out. There are several red flags that can tip them off. Buying a home in a neighborhood that doesn’t fit your socioeconomic profile is one. Another would be if your mortgage statements are being sent to a different address than your new “primary residence.” Either might cause your lender to send someone to investigate.
2. How much money you make
It’s really hard to exaggerate your income on a mortgage application. For one thing, your lender is going to verify all of the financial information you provide on your application, so if your tax returns, bank statements, W-2 forms, and the like don’t support your income claims, you won’t get the loan.
The tax return is the big one. Your lender is going to request copies of your two most recent ones, and will obtain them directly from the IRS—you can’t simply alter your own copies and try to submit them. If you do, your lender is going to wonder why your copy and the one from the IRS don’t match.
People who are self-employed sometimes feel they have a bit more room to fudge things, since they’re reporting their own income. But again, your tax return is going to tell the tale. You might exaggerate your earnings on the profit-and-loss statements from your business, but unless those also match up with your tax returns, you’re going to have a hard time getting your lender to buy those figures.
3. The origin of your down payment funds
Here’s one that many borrowers think is harmless: You’re short of cash for a down payment, so you ask a family member to front you the necessary funds, and pay them back later. What’s the harm in that?
The problem is that when you apply for a mortgage, you need to disclose all your other debt obligations on the application—and that loan from a family member is one of them. It represents part of your financial burdens that will compete with your mortgage payments for your financial resources. So your lender will want to know about it.
If you receive down payment assistance from a relative or anyone else, most of the time your lender will want you to provide a letter from them stating that the funds are a gift and do not need to be repaid.
4. Undisclosed incentives/rebates
In some real estate transactions, borrowers and lenders are tempted to “sweeten the pot” by making a side deal apart from the declared sale price of the home itself. Often, this is in the form of a rebate or kickback from the seller to the buyer when the asking price is greater than the buyer is willing to pay.
The seller may offer to cover the buyer’s closing costs above and beyond what is normal and declared. In some cases, the seller may even cover the buyer’s down payment. Such arrangements may be allowed in some situations, but what makes them fraudulent is when the lender is out of the loop—when they’re done separately from the official sales transaction and without the lender’s knowledge.
The harm here is that the lender is being tricked into financing more than the actual sale price of the home—so the lender is taking on more risk than expected and would have a harder time recovering the money in the event of a default.
5. A bogus co-borrower
In some cases, a borrower who doesn’t earn enough to qualify for the desired mortgage may seek to enlist a bogus co-borrower. The co-borrower, often a relative, falsely states that he or she plans to occupy the residence and contribute toward paying the mortgage, and so his or her income is counted toward qualifying for the mortgage.
The party who really gets hurt with this one are the co-borrowers. Even if they aren’t actually contributing toward the mortgage, it’s listed as an obligation on their credit report. So if they later decide to buy their own home or take out some other large loan, it’s going to hurt their debt-to-income ratio.
In addition, they could get stuck with the loan itself if you’re unable to keep up with the payments, since they also signed off on the loan. Not only that, but any payments you might miss will damage their credit as well, since both of you are equally responsible for the mortgage.
6. Your employment status
People will sometimes be tempted to stretch the truth a bit when it comes to reporting their employment on a mortgage application. For example, claiming you’ve been working for a company for three years when you’ve been there for only one—because lenders want to see at least two years of steady employment before approving a mortgage (changing jobs in the same field is OK).
In other cases, they may claim to own a nonexistent small business or get a friend to pose as an employer for whom they work at least part time. But neither of these will help unless your tax returns support the income you claim.
7. Hidden liabilities
One of the keys to getting approved for a mortgage is your debt-to-income ratio. That is, how much of your earnings you have to pay out each month to cover all your debt payments. So some borrowers will omit listing certain debts on their mortgage application to try to make it look like they owe less than they do.
This rarely works. For one thing, just about all established creditors—banks, credit card companies, auto lenders, medical services, etc.—are going to report your debt and payment history to the credit-reporting agencies. Your lender is going to pull your credit history when you apply for a mortgage, so it’s going to find out about it.
Similarly, some borrowers may try to game the system by taking out a large loan just before the mortgage closes—perhaps by using a cash advance on a credit card—and hope it doesn’t show up in the credit-reporting system before the mortgage is closed.
However, when you sign off on a mortgage, one of the things you sign is a statement that the information you’ve provided is accurate to the best of your knowledge. If you took out a big loan the day before, the information on your application is no longer accurate—and that’s mortgage fraud.