Why It's Important to Be Truthful on Mortgage Applications

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By Scott Sheldon

Your income is one of the major factors lenders use in determining whether you qualify for a mortgage. Which is why omitting, hiding, manipulating or not showing income may put you in a decidedly gray area with your mortgage company.

When you apply for a home loan, lenders require specific income documentation to fund a mortgage, including:

  • Income tax returns for the two most recent years, with accompanying W-2s
  • Corporate tax returns for the two most recent years if self-employed
  • 30-day pay stub history

One exception to this rule is when completing a government loan streamline refinance or a HARP 2 refinance. For those, no income documentation may be required.

But there are some circumstances in which you might decide to omit your income from your mortgage application. Here are a few scenarios where you can get into sticky territory when trying to get a mortgage.

The Self-Employed Borrower

There is no getting around the lending requirement to show two years of tax returns -- including corporate returns when applicable. Today's federal lending requirements prevent a lender from cherry-picking which income years to use for qualifying. For example, if your 2013 income was strong but your 2012 income was very low, the lender cannot simply ignore the 2012 income, as they must calculate a 24-month average of your income. So the lower income will, of course, lower your average.

Furthermore, if you are an employee of your own company, you're still considered self-employed. Why? You control and set your own income, unlike a traditional employee who does not have an ownership interest in the company. In this case, you'll still need to submit all the required documentation.

Non-Disclosed Income

The first question a prudent lender would ask is: Why are you trying to hide your income? Most of the time when the situation arises, it is because showing full income will make the lending scenario worse in trying to qualify. For example, if you're receiving income you don't disclose on your tax returns and you don't pay taxes on, you have bigger problems (as the IRS is particularly on the lookout for tax fraud). Simply put, it's best to give your lender all material information regarding your income. Doing so allows them to help you get a mortgage.

Side Jobs & Cash Deposits

If you're putting cash deposits independent of your normal income into your bank account and you don't document it with your application, you could throw a big wrench in your mortgage process. This is true whether it's a regular side income or not. If you're applying for government financing, all cash deposits must be documented and sourced, meaning you'll need to explain the origin of the funds. For conventional loan financing, lenders must source and document cash deposits that are 20% or more of your monthly income.

The Stronger Candidate

If two people apply for a mortgage, there may be a consideration made for whichever borrower has a stronger chance of qualifying. That applicant is usually the one most suited for the lender to review for loan approval. For a conventional mortgage loan, if one borrower's financial information is not as strong as the other's, the stronger borrower's credit, debt, income and asset history can be used on its own. This is not the case, however, for a government loan such as an FHA, VA or USDA loan where the debt of the spouse negatively impacts the primary borrower, whose income can't be used on the loan if their credit score is not high enough. In that situation, the income is ignored, but the debt is not. (You can check your credit scores for free on Credit.com with your spouse or partner to see where you both stand.)

USDA Quirk

There is a special consideration with a USDA loan. Unlike a conventional or an FHA loan for which you can cherry-pick which borrowers are included on the loan application, the USDA reviews total household income. For example, if one borrower generates $70,000 in annual income, and the spouse not on the loan generates another $40,000 in income, the total household income is $110,000 -- exceeding the USDA's income threshold (which varies by county). This means the lender must count the other $40,000 income, whether that person is on the application or not.

Ultimately, lenders want to make loans to borrowers who can fully support the proposed mortgage payment. (You can take a preliminary look at how much house you can afford using this calculator.) Most mortgage companies will want your mortgage payment and other debt to be no more than 43% of your income, though in some cases they may allow up to 55%. So it's important to be upfront with your lender about all sources of income from the beginning so they can help you navigate the mortgage process and become a homeowner.

Scott Sheldon is a senior loan officer and consumer advocate based in Santa Rosa, California. His work also has appeared on Yahoo! Homes, CNN Money, MarketWatch and in The Wall Street Journal.

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