Triggers of Lender Scrutiny

By VICKIE ELMER

IN recent years, lenders have stepped up fraud-prevention investigations and checks on mortgage applications. For borrowers, this may mean facing questions on actions like accepting cash gifts from relatives for the down payment or signing up for new credit cards during the application process.

The research firm CoreLogic estimates that fraudulent residential mortgage originations will total $7.4 billion in 2011; the number is nearly 40 percent lower than the $12 billion in 2010, though the company attributes the decline to a drop in mortgage volume. (Mortgage fraud involves falsifying information to obtain a loan you otherwise might not have qualified for.)

Fraud-prevention measures — mostly required by federal regulators — look into where you work and live, how you use credit, and more.

The investigation process typically starts when you first apply for a mortgage and lenders verify your identity and Social Security number, said Jeffrey Lipes, a senior vice president of Family Choice Mortgage, in Rockville, Conn., and the president of the Connecticut Mortgage Bankers Association. Further inquiries — an effort to obtain a copy of a brokerage account, for instance — may require approval or assistance from the borrower, he said, but mostly “the consumer is not even aware that we’re doing it.”

Lenders also check to see if a borrower’s name shows up on the government terrorist lists, among other things, and they check employment and credit reports — then check them again, within three days of closing.

What are they looking out for? Here are four common triggers to increased scrutiny, and what borrowers can do about them.

A LARGE BANK DEPOSIT Lenders are required by federal regulators to confirm that funds in an account come from bona fide sources, like a gift from your grandmother for the down payment. “We source it,” Mr. Lipes said — “find out where it has come from.” What constitutes a large deposit? That is based partly on your income, he explained. If you earn $5,000 a month and deposit an extra $10,000 beyond your paycheck, that may be considered oversized. Of course, if you were just married and received a bounty of checks as gifts, you might want have your marriage license on hand as proof, when you are providing your bank account information.

YOUR ADDRESS If you are buying a primary home three hours from Manhattan yet list your employment with a Midtown company, your case may draw scrutiny, said Jason Auerbach, the divisional manager for the Manhattan office of First Choice Loan Services. He suggests getting a letter from an employer noting, for example, that you are authorized to work from home four days a week. Likewise, a couple with three children who are buying a one-bedroom apartment may be scrutinized about whether this will be their principal home. Lenders want to make sure you’re the owner-occupant, not buying as a rental or to flip the property.

NEW OR UNDISCLOSED DEBTS When you’re in the process of buying a home, avoid taking on other debt. “Sometimes borrowers don’t think buying a new car prior to closing a loan is a problem, but it is,” said Carolyn Mitchell, a senior vice president of Aklero Risk Analytics, which provides software for mortgage quality control. Buying a sofa or a furnace on credit could also slow or even scuttle your mortgage closing, depending on your situation, if it pushed your total debt levels beyond acceptable limits.

INCOME ISSUES If you disclose that you earn twice what the average person in your occupation earns, you may need to document that discrepancy. Or if you used to be an independent contractor and were recently hired as a full-time worker, that might raise concerns, Mr. Auerbach said. It is relatively easy, Mr. Lipes added, to invent false documents that inflate incomes, so lenders routinely check with the Internal Revenue Service and other sources.

For Buying or Selling, it helps to have a guide that gives you straight answers. For more information on buying, selling, or renting out an income property in San Diego, please call Frank Rashid's cell phone at (858) 676-5250 or email him at rashid@rashidrealty.com. More to follow within the next couple of weeks.