Comment by dboreham
3 years ago
The whole "verify your salary with employer" process is BS. Lenders can verify income by requesting your tax returns, and N recent pay stubs (source: I own my employer and have verified income this way, since obviously they are not going to call myself up and ask me to verify my own income). This is only about reducing their verification costs. If there needs to be a giant database of everyone's income, the government should run it, and they already have the data.
If you verify with tax returns, it would be easy to borrow money from a friend and count it as income every year just for loan qualification. And then borrow more money from a bank, wait 6 months for seasoning, and use it as down payment to buy real estate.
And if the loan gets sold to the government, it needs to meet government underwriting criteria and the lender has no free will. Especially for residential mortgages: No private business cares about 3% interest on a loan, they sell those to the government and make money on the origination fees.
If you get a hard money loan, they'll only ask for tax stubs but you'll also pay 10-12% interest. If the buy is really good sometimes they don't even care about taxes or ability to repay - they get your equity if you default so who cares if you make a dumb decision? It's mainly the government loans where they really try to avoid defaults.
> If you verify with tax returns, it would be easy to borrow money from a friend and count it as income every year just for loan qualification.
1) Where do I make friends with people who have such large piles of cash laying around they're willing to front me stacks large enough so I can lie and claim it as income on my taxes to inflate the size of the loan I can get? Multiple years in a row?
2) Once I claim it as income, I owe about a third of it to the federal and state governments in the form of.. income tax. Is my friend okay with only getting about 70% of each loan back after each tax season?
I mean, if my rich friend loans me $100K each year, after three years (the number of tax returns I had to show for my last mortgage), He'll have lost about $90K on the deal... wouldn't have just been easier for him to gift me the $90K the first year and I could put it towards my house and then not needed such a large loan in the first place? It'd have saved us all three years of hassle.
I don't want to derail the thread into discussing exact mechanics. I just think if most people underwrote loans according to their intuition, they'd lose a lot of money. And a tax return is controlled by the same person applying for the mortgage, so is less valuable than the same information split among two people.
2 replies →
"Friends" might be a misnomer, these are usually fraud rings/criminal organizations.
>If you verify with tax returns, it would be easy to borrow money from a friend and count it as income every year just for loan qualification.
Huh? Isn't it fraud to declare something as income that's not actually income? Also, if you declare something as income, don't you have to pay tax on it? So this scheme will mean you have to pay a bunch of taxes you wouldn't have to otherwise. This sounds like the opposite type of fraud people do. People usually under-report income, not over-report it.
"Yes IRS, I made $1T last year." "Ok cool, send us $400B in taxes please."
> Isn't it fraud to declare something as income that's not actually income?
Mortgage fraud is a thing that exists, so it's not like labeling it as a crime lets you forget about it.
> don't you have to pay tax on it?
If you're borrowing at 30x leverage like some government loans give, taxes on the down payment is a small increase in cost-of-leverage which is more than made up for by the reduced interest rates.
Anyways, my point is, there's good reason to look at the same income viewed in multiple ways. Adding an employer into the mix is at least a separate person(which is probably why they waived the requirement in OP's case), while tax returns are filed by the potential fraudster/"entrepreneur".
If you're "borrowing" money from a friend to bump up your income, you're likely going to bump yourself up into a higher tax bracket and end up paying more money in taxes.
On the money you borrowed. Moving into a higher tax bracket does not mean you pay the higher rate on all earning, but rather only marginal earnings in the higher bracket.
Regardless, it doesn't make sense to pay taxes on borrowed money. I'm not sure this scheme is real.
10-12% is higher than my credit card APR is that really what hard money loans are going for now?!
The US average is a above 16%.