Should I Lie About My Income?

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March 5, 2001

“I'm self-employed with a low income, but my credit is perfect and I have substantial assets. I felt I was a perfect candidate for a no-ratio loan but my mortgage broker showed me that I can get a lower interest rate with a "stated income" loan. He told me to enter a fictitious income amount on the application that was large enough to meet the lender’s requirements. He swears the lender will never check my income, but I’m still uneasy. Should I be?”

I would be because I am always uneasy when I lie. How risky it is depends on the likelihood of being caught, and the broker's opinion on that is probably pretty good. The broker, however, is not worried about the risk because he is only entering the number you give him. Your neck is the one on the block.

A “stated income” loan is one designed mainly for self-employed people who often have difficulty documenting their income. The lender qualifies you on the basis of whatever income you put down on the application.

Because the lender assumes you have the income you say you have, the price of a stated income loan is lower than that of a no-ratio loan. On a no-ratio loan, the lender qualifies you without taking account of your income.

The risk of declaring a false income on a stated income loan is that the lender at closing will require you to sign a paper that authorizes the lender to obtain your last two tax returns from IRS. Most lenders spot-check about 10% of all loans as part of a quality control process. Spot checking a stated income loan involves comparing the income on the application with the income on the tax return. If you happen to be selected in the spot check and a discrepancy is found, you are in big trouble. The lender can demand immediate repayment of the loan, or worse.

Presumably your broker is confident that the lender selected for your loan will not require authorization to check your tax return. I would still be concerned. The broker is not worried about a small probability that you could get into trouble, but you should be. See the letter that follows.

December 20, 1999

" Can a mortgage lender change the terms after the loan has been closed and several payments have been made on time? The problem that I might have is that the 1040 I submitted to the mortgage lender is not exactly the same as the one I submitted to IRS. The lender made me sign IRS form 8821 and 4506 on the date of closing..."

Self-employed borrowers and those who want to avoid the processing delays that arise when lenders verify their employment, are usually permitted to demonstrate their income from their IRS form 1040. In such cases, the lender requires the borrower to authorize the lender to check the 1040 filed with IRS. If there is a significant discrepancy between the two, the borrower has committed fraud and the lender has the right to call the loan, which would ordinarily force the borrower to sell the house.

You made the serious mistake of providing the lender with erroneous information, while authorizing the lender to verify it! Consider yourself lucky that instead of calling the loan, the lender is merely rewriting the terms, which probably means an increase in the interest rate.