Trust is an important element in any relationship, especially in contracts between borrowers and lenders. False or misleading information may seem like a shortcut to generating profits in the short term, but in the long term it can cripple the system, increase risk, and ultimately cost everyone. It will push it up.
One of the ways in which it is increasingly feared that borrowers may attempt to take ‘fast loans’, sometimes with encouragement (explicit or implicit) from loan originators, is to Misrepresenting the nature of the real estate. Arguing that the home will be used as a rental by the owner rather than as a primary residence can pave the way for faster and easier approval through a Debt Service Coverage Ratio (DSCR) calculation.
This feature is intended to benefit real estate investors and owners of multiple properties by allowing access to capital based on rental income streams rather than the borrower’s personal salary. Masu. Therefore, if your rental income is proven, you don’t need tax documents, pay stubs, or other information. Indeed, during times in the market cycle when traditional or large originations are down, it makes sense for lenders to consider alternative products such as DSCR.
However, in our experience reviewing hundreds of thousands of loans since 2008, including those currently in focus for DSCR, we have identified red flags that may pose risks to loan securitization originators and holders. I discovered. Our analysis suggests that it is becoming very easy for borrowers to use DSCR loans as a way to bypass traditional loan due diligence. This is precisely due to a more streamlined qualification process and exemptions for qualified mortgages and TRID (TILA/RESPA integration). disclosure) requirements.
Fortunately, there is an easy solution for lenders. It’s all about rigorous diligence and common sense precautions. Here are some things to keep in mind:
● contradictory information: You should be able to easily spot discrepancies between your loan application and all supporting documents. Inspecting a borrower’s listed employment, income, and address for discrepancies should raise red flags.
● Absentee tenant: If the applicant claims that he or she does not occupy the property, the evidence may suggest otherwise. This may include addresses on utility bills, insurance binders, payroll checks and bank statements.
● Suspicious rental contract: If the tenant is offering a lease to a family member or employee, check to see if it was signed within a few days of closing, or if the lease amount is much lower or much higher than market value.
● Borrower’s history as a landlord: Checking their tax returns for rental income or loss can tell you if the tenant has a track record.
● Consider the investment value associated with your primary residence. For example, if an applicant owns a single-family investment property worth $900,000 and his primary residence is only worth $150,000, a more detailed investigation into occupancy may be required.
● Work location: Does the borrower work in an office in another non-contiguous state other than the state of primary residence?
With haunting echoes of the Great Financial Crisis of 2008, the surprise entry of borrowers poses a triple risk for them, their lenders, and the economy as a whole, given the leverage and commoditization of loans. Become. Paying a quick fee for an easy closing is not worth the pitfalls.
We are confident that the industry can continue to work to eliminate loopholes and keep mortgages safe.
