How Much Is Too Much?
by Peter G. Miller
"I'm in trouble for a stated loan," said a note from the far reaches of cyberspace. "How much overstating your income is considered fraud?" What's obviously best is to get the numbers right when making a loan application. It's equally obvious that "stated income" mortgages open the vault to temptation. Such no-tell loans ask borrowers what they earn and the borrower then puts down a number. Unlike a typical mortgage application, the lender usually does not verify the figure with tax returns, pay stubs or calls to employers. The term "usually" is important. There are at least two instances when stated-income applications are likely to be verified -- if the loan is one of the lucky few audited when sold to an investor or if the mortgage turns sour and must be foreclosed. Lenders are able to check past tax returns because they typically require borrowers to sign an IRS Form 4506 at closing -- a form that gives a third party the right to look at past tax returns. But what is overstated income? Absolutists will say anything above the applicant's earnings. But do we allow for rounding up -- claiming to earn $100,000 when we actually earn $99,900? Is it okay to claim more income than is shown on past tax returns because of so-called "expected" income? Think of the individual completing med school with a new job in hand who provides a written explanation for underwriters. Alternatively, if you earn that $99,900 you're not earning $110,000 or $150,000. And if you bag groceries in a supermarket you're unlikely to be in the highest tax brackets. Henry Savage, president of PMC Mortgage Corporation in Alexandria, VA, says borrowers should "make sure your stated income meshes with and makes sense with your type of employment." David Reed, a loan officer and the author of Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, defines fraud by borrowers as generally "a willful intent to mislead in order to get a loan they otherwise wouldn't have gotten." In other words the requirement is not a perfect loan application, it's a good faith and verifiable effort to get it right. For those with 1040EZ returns the process of completing a loan application should be quick and easy. The situation is more complicated for those who are self-employed or own a business. For such folks "taxable income" is what remains after deductible expenses -- but the catch is that what is or is not deductible may be debatable. Money magazine used to run a "tax test" where several dozen tax professionals were given model income data and asked to compute the tax. Inevitably each expert came up with a different result for Uncle Sam and sometimes the results differed wildly. So how much overstating is allowed? Purposely inflating income is a huge no no. Enlarging income because a loan officer says it's somehow "okay" is not okay. If you're now in trouble with a stated-income loan, then it's necessary to have an attorney review the mortgage application. It may be perfectly fine if the income claimed can be readily documented. But if that's not the case, then a lender faced with a loss, or an investor auditing a loan, will surely want to know how income claims were justified. The first place they'll look is at the tax returns they're allowed to review with a Form 4506. If we assume that lenders have any sense at all then they plainly recognize that one reason some borrowers turn to stated-income loans is precisely because they represent an opportunity to fudge the numbers. No doubt some lenders reason that overstatements are not a difficulty because home values are generally rising and if there's a wrongful application then hey -- mortgage fraud is a problem for the borrower. But with a growing number of stated income loans on the books, financing with exaggerated numbers could quickly become a lender concern if home values dip, the economy slows and monthly payments don't show up. That's the point at which stated income loans will come home to roost. | 
