Mortgage - Common Red Flags

When you submit your mortgage loan application with all supporting documents to start the loan process, it’s a straight-forward process. Your loan agent will be the first person to review your application and documentation to make sure everything is in order and at the same time, see if any of the information could potentially be a Red Flag. When your application gets to the Underwriting department, the underwriter will further scrutinize everting in your file, and this is all very standard procedure.

Inconsistencies in the loan file are often a tip-off that the file contains misrepresentations. The presence of one or more red flags in a file does not necessarily mean that there was fraudulent intent.  However, several red flags in a file may signal a fraudulent transaction. Below are just a few of the Red Flags that loan agents and underwriters look for.

High-level Red Flags

  • Social security number discrepancies within the loan file
  • Address discrepancies within the loan file
  • Verifications addressed to a specific party’s attention
  • Documentation includes deletions, correction fluid or other alteration

  • Mortgage Application

    Mortgage Application


    • Significant or contradictory changes from handwritten to typed application
    • Unsigned or undated application
    • Employer’s address shown only as a post office box
    • Loan purpose is cash-out refinance on a recently acquired property
    • Buyer currently resides in subject property
    • Same telephone number for applicant and employer
    • Extreme payment shock may signal straw buyer and/or or inflated income

  • Sales Contract

    Sales Contract


    • Non-arms-length transaction: seller is real estate broker, relative, employer, etc.
    • Seller is not currently reflected on title
    • Purchaser is not the applicant
    • Purchaser(s) deleted from/added to sales contract
    • No real estate agent is involved
    • Power of Attorney is used
    • Name and/or address on earnest money deposit check differ from buyer

  • Credit Report

    Credit Report


    • No credit history or “thin” credit files
    • Invalid Social Security number or variance from that on other documents
    • Duplicate Social Security number or additional user of Social Security number
    • Recently issued Social Security number
    • Liabilities shown on credit report that are not on mortgage application
    • Length of established credit is not consistent with applicant’s age
    • Credit patterns are inconsistent with income and lifestyle

  • Employment and Income Documentation

    Employment and Income Documentation


    • Employer’s address is a P O Box, the property address, or applicant’s current residence
    • Employer name is similar to a party to the transaction
    • Employer unable to be contacted
    • W-2 form presented is not the employee’s copy
    • Income appears to be out of line with type of employment
    • Self-employed applicant does not make estimated tax payments
    • Real estate taxes or mortgage interest claimed, but no ownership of real property disclosed
    • Applicant reports substantial income but has no cash in bank

  • Asset Documentation

    Asset Documentation


    • Down payment source is other than deposits (gift, sale of personal property)
    • Applicant’s salary does not support savings on deposit
    • Applicant does not utilize traditional banking institutions
    • Bank account ownership includes unknown parties
    • Earnest money is from a bank or account with no relationship to the applicant
    • Bank statements do not reflect deposits consistent with income

  • Appraisal

    Appraisal


    • Appraisal ordered by a party to the transaction
    • Occupant shown to be tenant or unknown
    • Owner is someone other than seller shown on sales contract
    • Appraisal indicates transaction is a refinance, but other documentation reflects a purchase
    • Photos appear to be taken from an awkward or unusual standpoint 

  • Title

    Title


    • Prepared for and/or mailed to a party other than the lender
    • Seller not on title
    • Seller owned property for brief time
    • Buyer has pre-existing financial interest in the property
    • Chain of title includes an interested party such as realtor or appraiser
    • Buyer and Seller have similar names (if concealed non-arms-length)

  • Owner Occupancy

    Owner Occupancy


    Purchase Transactions:


    • Real estate listed on application, yet applicant is a renter
    • Applicant intends to lease current residence
    • Significant or unrealistic commute distance

     

    Refinance Transactions:


    • Rental property listed on application is more expensive than subject property
    • Different mailing address on applicant’s bank statements, pay advices, etc.
    • Different address reported on Credit Report
    • Significant or unrealistic commute distance

  • Settlement Statement

    Settlement Statement


    • Borrower or Seller names are different than sales contract and title
    • Sales price is inconsistent with contract, loan approval and/or appraisal
    • Excessive earnest money or builder deposit
    • Earnest money deposit is inconsistent with sales contract and/or application
    • Refinance pays off previously undisclosed liens
    • Seller-paid closing costs, especially for purchaser with sufficient assets for down payment
    • Cash proceeds to borrower are inconsistent with final application and loan approval