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When completing your mortgage application, it is critical to follow one simple rule: honesty is still the best policy.
While there are cases of an applicant making an innocent mistake, there are also instances of true deception – like omitting children or dependents to avoid declaring expenses associated with them.
Lenders are not against children or dependents, but they want to calculate your capacity to pay off your home loan if you have dependents.
Mortgage applications ask for dependents so that banks can calculate your income and living expenses, and if you have children, the amount you can borrow will automatically be affected. With dependents, you have more commitments and, therefore, a lower disposable income. Typically, lenders use the Household Expenditure Method (HEM) to determine your living expenses. You may also be asked to give an estimate of your living expenses, to determine whether you are above or below the average cost of living.
The bank will then use whichever one is higher to help calculate your borrowing power. You may need to be careful when estimating your living expenses because having dependents negatively impacts your borrowing ability.
By not declaring dependents on your mortgage application, you can run into financial and even legal issues including the prospect of having your home loan rejected, ending up on a “black list”, having your loan recalled by the bank, or even facing fraud charges.
Mortgage lenders and brokers cross-check and vet everything in your application. If an error on an application was innocent, the lender will most likely ask you why the proper information was not disclosed and update it. If as a result of an error you can no longer afford the loan, you may be required to make changes for the loan to be approved.
If a mistake is not as innocent—such as not declaring dependents—your loan will be declined and it is possible that the lender, and mortgage insurer, will never consider you again. There is also the potential to end up receiving a black mark on your credit score – or, as mentioned, facing serious legal issues.
Last year, a UBS study found 37% of home loan candidates admitted lying on their applications.
“It is fraud, and fraud is a serious crime in Australia, punishable by jail,” MyCRA Lawyers chief Graham Doessel told Yahoo Finance. “If you lie about your wage, the bank will be able to cross check it against your statements. If you lie about your debts, they will be able to check with just about every lender in the country except your local loan shark.”
The most common lies people make on applications aren’t a deliberate deception. Most common of all are errors that happen because the candidate is unaware of how much they are spending month to month or because they do not know their income. Occasionally, applicants will have older credit cards that they do not use and therefore do not declare them. Since they are still active, however, they should be included in the application.
Regardless of the error, mortgage brokers stress the importance of tracking your expenses and knowing your budget, since there is often a “black hole” where you may forget where your money is going.
If you lie on a loan application, the fallout can vary depending on whether it happened before or after the settlement. If it happens prior to the settlement, the lender can rescind the approval. If the lie is detected following the settlement, the lender can pull the loan back, giving the borrower 30 days to repay the entire loan and could end in a forced sale of the property.
“Being convicted of a fraud offence is a real pain in the backside,” Doessel said. “You might recall the last time you applied for insurance they asked if you’d been convicted of fraud. Well, now you will have to say ‘yes’. Not only is it embarrassing, it means you won’t get insurance or at best have to pay a much higher premium.”
Since the stakes of lying on your mortgage application are so high, it’s best to err on the side of honesty.
