Never fib to a lender

To stretch their buying power, more than a few borrowers stretch the truth. "Everybody fibs a little," they say. "Besides how's the lender going to find out?" Verifications, that's how. Even stated income or stated asset loans require that you state the truth. (If you prefer to avoid stating the truth, use a NINA (no stated income, no stated assets) product.)3

Verify, Verify, Verify—Then Audit

Most surely, except for "low doc" or "no doc" loan products that carry higher costs, lenders will check your income, assets, and debts. They may also want to see your divorce or separation agreement, where you're getting the money for your down payment, any gifts you claim to have received, bank and investment account balances, and virtually any other fact that stands material to your loan application.

Verification of Income

To verify income, your lender may call or write your employer, inspect your pay stubs, ask to see copies of your tax returns, and/or request your permission (Form 4506) to contact the IRS directly. To perform these checks the lender will compare all numbers obtained through third-party sources with each other and with those provided on your loan application. Should the lender discover (nontrivial) discrepancies, it will delay or deny your loan.

Confirm the accuracy of the figures you provide. Prepare to explain anything that a critical eye might view suspiciously.

Verify Debts

To verify the amount of your debts, the lender will obtain credit reports from the three major credit repositories (see Chapter 5). In addition, the

3This chapter tells how to best qualify for full-documentation loans. To avoid verifications (and pay a higher interest rate), request a "low doc" or "no doc" loan.

lender may ask you to provide your most recent monthly bank account statements. The lender may also run a separate check ofpublic records to look for outstanding judgments or liens against you. Because discrepancies among debt balances are common, take care to provide evidence that the figures you show on your application reflect the truth.

For example, you may have paid off your car loan two or three months ago, but Experian still shows a balance of $1,400. If you can't get Experian to quickly correct its error, give the lender a copy of your auto title, lien satisfaction, and canceled check.

Other Verifications

To make sure you do not (improperly) borrow funds for your down payment, lenders may require you to provide bank statements from the past three months. If you're separated or divorced, previous joint debts with your (ex-) spouse will still show up on your credit report. Make sure you list these debts on your application. Likewise, should your divorce agreement saddle you with financial obligations, declare these, too. Even if they don't show up in your credit file, the lender will likely discover them by obtaining a copy of your executed divorce (separation) agreement.

The Application Itself Reveals Your Integrity

Most lenders carefully review your loan application. They search for numerical discrepancies, missing information, gaps in dates, inconsistencies, and any whiffs that smell fishy. "Hmm," the lender muses, "You say you've been out of college only three years, but you list no debts for student loans and you report cash savings of $25,000. How did you manage that feat?"

Experienced loan reps and underwriters have examined hundreds of loan apps. Their eyebrows raise easily. If your life story evokes an air of mystery, don't leave the loan rep in the dark. Turn on the light. Provide firm evidence that you're traveling the straight and narrow. Even innocent lapses in your application can spell trouble if you do not satisfactorily explain them.

Justify hard-to-believe items. Do not try to slip by an application that intends to deceive. The best lenders would rather solve your income, debt, or credit problems than loan money to someone they do not trust.

In testimony before Congress, the great banker J. Pierpont Morgan was asked:

  1. "Is not credit based primarily on money or property?" A. "No sir, the first thing is character." Q. "Before money or property?"
  2. "Before money or anything else. Money cannot buy credit. Because a man I do not trust could not get credit from me on all the bonds of Christendom."

Take J.P. Morgan's advice. Don't play games with the lender. Report all income and debts truthfully. Not only does honesty result in greater borrowing power over the long run, it will keep you out of jail. Lying (or misrepresentation) on a mortgage application subjects you to thousands of dollars in fines and a lengthy visit to federal prison. (In recent years, many commission-hungry loan reps have conspired with borrowers to create "liar's loans." We will discuss this dangerous trend in a later section.)

SECRET # 12

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