Death and Taxes (and Mortgages)

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tax collectorThere’s an old joke that there are only two things in life a person has to do. Everyone has to pay taxes and we all have to die eventually. Well, today we’re finding that more and more homebuyers DO NOT file their federal tax returns with the IRS, which often means they’ve not paid their taxes.

Some of you may not know this, but a normal part of the verification process of a mortgage loan is to check the filed tax returns of all borrowers. Due to increased tightening of underwriting guidelines, most mortgage investors order a copy of the filed tax returns for each borrower from the IRS. This is done using the 4506 Form which borrowers are required to sign at the time of loan application.

Mortgage underwriters are reviewing the tax returns to see if you (the borrower) are writing off any business expenses. Even on salaried borrowers, the underwriting rules require that borrower’s income for qualifying purposes be reduced by the amount of the business expenses they are writing off on their tax returns.

Many salaried people write off unreimbursed employee expenses on Schedule A of the 1040 tax form. Other salaried people have business expenses that they write off on Schedule C for a side business. 

In addition to business expenses which can reduce the borrower’s income for mortgage loan qualifying purposes, mortgage investors are finding that an alarming number of borrowers have either not filed a tax return or that the tax returns they filed with the IRS do not match the tax returns they provided as part of their mortgage loan application. Yes, they’ve created two sets…. and yes, this is attempted mortgage fraud.

Both of these actions are serious federal violations. In the state of Georgia, mortgage fraud is a felony.

Maybe the moral of this story is this is no joke and the consequences of being found guilty of either of the above violations may not be death, but the possible consequences are definitely no laughing matter.

Don’t try this at home.

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14 Responses to “Death and Taxes (and Mortgages)”

  1. Arthur Harris Says:

    Judy,

    Excellent post, we need to let all our potential buyers know how serious the IRS views the issue of mortgage fraud especially here in Georgia where it is considered a felony.

  2. Sharon Darby/Ops Mgr. Says:

    Thank you Judy for bringing attention to the issue of not filing tax returns, or altering what is submitted to the mortgage company to show more income or less expenses than what was filed with the IRS.

    It is amazing that so many buyers seemed to be shocked that doing one of the above can keep them first from getting a mortgage, and secondly, that doing so is considered fraud!

  3. Anne Langley Says:

    It should be three things you have to do–pay your mortgage, pay your taxes and die.

  4. fraudstopper Says:

    In a perfect world the underwriter can or may find the fraud while reviewing the tax returns either on the first attempt or when the IRS sends back copies of the original filings. (if everyone has done their job – but sometimes – this is just not a perfect world and false tax returns get by). Or, maybe one of the technology companies may identify possible fraud as well. A solution is to make the LO’s more aware of when a borrower may be providing not only false tax returns but other information as well by recognizing changes in facial expressions and body language during the explanation of forms like the 4506. Another one that shows change is when the HUD-1 is explained in detail, which unfortunately does not occur in a normal application, but should. Maybe the three things we should do is describe what we know about mortgage fraud in the beginning of the application, make them aware of the consquences of providing false information, then explain jail time .

  5. Dennis Doll Says:

    It never fails to amaze me what people will do (or not do). Seems like some people will try to just skate by and hope no one catches them. In the end all of us who follow the rules end up paying for all those who don’t.

  6. Terry Young Says:

    Short cuts are NEVER short!!! The sad part about this, is that so many people do not think they will get caught. You know what you Mother told you . . .”what goes around, comes around”. No-one is exempt! Thank you Judy for shining a large light on problem that we all need to pay attention to. “I did not know” is not acceptable. No excuses!

  7. Dottie Wise Says:

    Great post! ” A funny thing happend to me on the way to”… a closing early in my real estate career. All parties seated at the closing table and attorney asked buyer to sign a form allowing the mortgage company to review his federal income tax returns. For some unknown reason the mortgage company had failed to get this done during application.(Mortgage applications were less complicated in late 80’s) Buyer broke out in an obvious cold sweat, turned white, stood up and said no way was the mortgage company checking his returns. He took his wife’s hand and led her from the closing table, tears and all. Needless to say, the seller’s got the earnest money!

  8. fraudstopper Says:

    Dottie: Great example. Now if we could rewind this picture and have this happen during the loan application we could all save a lot of stress. The chain reaction is enormous when you consider all the players involved from the moving van with no place to drop off the furniture to the seller who now must postpone their closing and move. The loss of income and the cost of having done the loan could also be avoided by just taking a stronger loan application and learning to recognize possible fraud.

  9. Gerard Dickson Says:

    Judy,
    this is a great post and that’s why we stress getting pre-approved vs. pre-qualified upfront in the process, so that we mitigate the stresses of buying homes in this tough economy.

  10. Sandra Rodrick Says:

    Very timely article, Judy. Just today I read an article that discussed the FBI’s increasing case load of mortgage fraud. The article stated the FBI is investigating 2,100 mortgage fraud cases this year so far, which is up from about 1,600 in 2008 and 1,200 in 2007. We’re moving up the ladder in this field but I’m certain this isn’t the direction we want to go. Back in ’03, there were only about 400 cases. it’s such a shame that there are so many people out there working so hard to be devious when it’s so simple to do it correct and legal way. Sure the results may not always work out to your favor but then it’s back to that old adage, “Try, try again”. Doing ot correctly a few times until you’ve met the criteria takes a lot less time than a stint in Federal prison- just ask Bernie! The FBI is encouraging consumers when considering a mortgage to seek advice from a trusted person which they describe as a friend or relative! Afriend or relative?? I don’t think so. The place to go is to a trusted professional and Metro Brokers Financial houses a whole group of trusted finanicial professionals. Why should any one take a chance on fraud when they come visit the Credit Doctor and get fixed right up!

  11. fraudstopper Says:

    Sandra: (AKA Credit Doctor)?
    Let me give you an update especially regarding FHA loans. They account for 31% of the today’s loans worth about $600 billion this year, and it’s estimated that $7.5 billion will experience EPD (Early Payment Default) in 2009. The fraudsters are very smart people and even the best of the best can get taken for ride down fraud lane if they don’t know what to look for during a loan application, sometimes even doctors can get fooled when the patient is good at lying.

  12. Sandra Rodrick Says:

    You’re absolutely correct. The fraudsters are smart and getting smarter, especially with technology changing daily that assists them perfectly. Everyone responsible for making a mortgage happen needs to pay attention and stay diligent all through the process. There are no easy answers and sometimes the most correct answer is, “Sorry- no can do!” Trust those hairs on the back of your neck!

  13. Sharon Darby/Ops Mgr. Says:

    The sad thing is we have to waste so much time trying to catch and outsmart the Fraudsters that could be much better spent helping qualified, deserving buyers get a home!

  14. fraudstopper Says:

    Sharon: I agree 100% but that’s the nature of our business. Just like my doctor continues to study to improve techniques on helping me stay alive we need to study to learn to help the good and identify the bad. We can do it voluntarily or wait long enough and we’ll be forced to take whatever training becomes approved. We can A) police ourselves or B) be policed, I choose A.

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