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Thursday, March 18, 2010

How to stay out of mortgage loan fraud -- Hud 1, Mortgage fraud check list, loan closing information

Mortgage Loan Check List
Including the HUD-1, closing tips, mortgage fraud links, real estate closing trouble spots!

Stay out of trouble!  Spot loan fraud snakes!

The Federal Loan Fraud Task Force is hard at work looking for buyers, investors, real estate and loan brokers and others who have broken lending laws.  The indictments include federal judges, doctors and lots of buyers, sellers and real estate investors.

The following check list, while not all inclusive, will help you stay out of trouble!

Application process:
Are you self employed?  If so, have there been income changes which are not reflected on your tax return?

Have you had a job change since making your application?  If so you must report it, including changing employers, change in income, and loss of job.

Have you had any changes in debt?  If you have incurred more debt or paid off substantial debt you must report it.  The lender will obviously want to know if you owe more money.  But it is also your obligation to report a major shifting of assets.  If you have less debt but less cash on hand, for example, the integrity of the loan might be deemed to be compromised.

Are you making more money than you did before?  Some loans are based upon income as a percent of the poverty level.  Some bond loans, for example.  If you end up making too much money then you will be committing loan fraud if you fail to disclose your new income.

Down Payment:
Did you borrow it?  You must disclose all sources of down payment. 

Was it a gift?  A gift from your father in-law is one thing.  A gift from the office manager from the mortgage company whom you just met is another.

Did you sell assets to get it after you made your loan application?  Trading assets that the lender thinks you need to work, for example your work truck, is may make a difference in qualifying.  

Is the seller or broker or anyone involved in the transaction helping you? Disclose.  As long as the lender knows about the deal and it is disclosed in writing to the loan agent, you have a deal.

Are you doing repairs on the property to get it?  Some loan programs allow you to take part of your down payment in the form of the value of repairs to the property, others don't.  Don't fudge on this one!

Are you getting a credit back at closing?
You must disclose where the down payment came from.  Side deals are not allowed.  Be honest, tell the lender where the dough is coming from!

Closing costs: All of the above apply to closing costs.

Contract:  General principle:  If it is in the contract you have the right.  If it is not in the contract you may or may not have the right.

Put it in the contract!  What is it?
a.  Adequate time to inspect the property.
b.  Adequate time to review the appraisal, the title documents, matters which may not be of public record and other factors.
c.  Your earnest money comes back under what circimstances?
d.  Make sure any agreements you make with the seller, the Realtor the loan agent and all others in the process are specified.  For example, the seller is going to credit money to you at closing.
e.  Make sure you disclose special relationships, that you are an attorney, you are a Realtor, you have an interest in the property perhaps as a partner or the owner of the company that owns the property.
f.  Will you have a right to a walk through of the property on the day of closing or are you taking the seller's word he will leave it in good shape?
g.  If you are buying a rental property, be sure you have an agreement from the tenants about how much rent has been paid and how much the deposits are.  They call this an estoppel agreement because once signed, it usually 'stops' the tenant from making claims he paid the rent or deposits are due.  Don't rely on just the leases, as agreements may have been made between the time of leasing and the time of your buying the property. 
h.  If you are going to occupy the property have in writing the date certain the tenant is going to move out.
Day of closing: Insist you get a copy of the closing documents at least two days prior to the date of closing.  Put it in the contract.  If you are not sure about a figure, don't be afraid to stop the entire process to check things out.

Are there any credits, charges, loans, gifts or other not disclosed on the HUD-1 settlement statement?  Make them fix it or get an attorney.

Settlement documents:  Most come right off of the HUD-1, but check a few lines to be sure.

Promissory notes: 
a.  Make sure the note agrees with the rate you you were quoted.  
b.  Are there any balloon payments?
c.  Is this an adjustable rate mortgage?  If it is, be sure you understand how the adjustment will be made, when the adjustment will be made, and that you are prepared to make the payment when the adjustment is made.  If the note adjusts in less than a year walk away from the deal.

Special points:
It is time to get an attorney when:
  • The seller, the buyer, the broker, the loan agent, the lender or the attorney start talking about side agreements, essentially agreements the lender does not know about;
  • You have a problem with the deal and the seller or broker is hedging on your down payment;
  • A big problem is brought to your attention at the time of closing.  Usually, you can tell it is a BIG problem when someone comes to you and says, "By the way, we just have this little problem to figure out."  Big problems usually come in the form of interest rate changes, extra closing fees, unknown or undisclosed conditions of the property, and title issues.
  • There are charges on the settlement sheet which you did not agree to.  Be sure to compare the lender's good faith estimate to the charges on the HUD-1.  Watch for those hidden charges like doc prep fees, courier fees, special loan review fees, and extra points or origination fees.

     Are you involved in a real estate "fix and flip"?  Flipping Frenzy
will clue you into some of the illegal practices.  

     Have you been the victim of discrimination?  Discriminatory practices are illegal.

     The Federal Mortgage Fraud Task Force  will give you plenty of ideas about how to get into trouble fast, hence how to stay away from mortgage fraud problems!

     This list is hardly all inclusive.  It provides some of the known trouble spots in your loan closing.  However, nothing can take the place of a professional opinion.  Don't be afraid to bring your attorney to closing!

    Best of luck,

    Uncle Tim

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