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In a Domestic Partnership? What you Need to Know About Your Mortgage

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Domestic partnerships can be the source of a lot of confusion. While they were once commonly referenced in relation to same-sex couples, they are also an option for opposite-sex couples who have a long-term commitment. They allow committed partners to access some of the rights afforded married couples, such as sharing of employer-provided health benefits.

As non-traditional families have evolved over the years, questions inevitably come up about how to handle joint assets purchased and debts incurred within a domestic partnership. Since a mortgage is likely the largest debt a couple will have in their lifetime, it’s important to understand what you need to know if you have a mortgage in a domestic partnership.

What is a domestic partnership?

A domestic partnership is a legal agreement created to formalize a relationship between a couple so they can obtain some protections under the law. Domestic partnerships are usually formed by signing a state registry, but can also be created privately in states that don’t recognize them.

In the past, domestic partnership have mainly been characterized as alternatives to marriage for same-sex couples. Up until a landmark Supreme Court ruling made same-sex marriages legal nationwide, domestic partnerships were a common option for same-sex couples to be given some of the basic legal rights as married heterosexual couples, such as sharing of employment insurance benefits.

However, opposite-sex couples may choose domestic partnerships over marriage for a variety of reasons, financial or philosophical. There are important things that domestic partners should know about mortgages, regardless of whether the partnership involves a same-sex or heterosexual couple.

It’s important to know that domestic partnership laws vary drastically from state to state. Some only provide marriage alternatives for same-sex couples, while others will only grant the domestic partnership rights to opposite-sex couples over age 62. Be sure you know the laws regarding domestic partnership in your state, or how to protect yourself legally if the state doesn’t recognize them at all.

Why choose a domestic partnership?

Until the late 20th century, domestic partnerships recognized heterosexual couples who lived in relationships that had had the commitment of marriage, without actually getting legally married. Over time, state laws began offering them legal rights under common-law marriage statutes, and the term was expanded to include unmarried couples who lived together in a committed relationship.

According to a Pew research study, the number of couples unmarried but living together reached 18 million in 2016. That’s an increase of 29% from 2007.

The reasons for entering in a domestic partnership range from just not wanting to get married, to wanting a more structured commitment without the formality of marriage. There may be financial benefits when it comes to insurance coverage, and because most state laws regarding dissolution of a relationship are related to marriage, ending a domestic partnership may come with fewer strings attached.

In order to qualify for any benefits, domestic partners must meet the registration requirements of the state they live in, or have private legal documentation that creates the partnership (this applies in states where domestic partnerships are not recognized). There are some criteria that must be met for the domestic partnership to be valid, such as:

  • Neither party is married to someone else.
  • The partners have the legal right to marry.
  • The partners are not related.
  • The partners are currently sharing a residence.

Basic property ownership rights for domestic partnerships

Property ownership rights related to domestic partnerships will vary based depending on the laws of the city and state where the couple lives. This includes the rights a partner has to property that was owned before and during the partnership.

In most cases, it’s in the best interest of couples joined in domestic partnerships to have a will that outlines how jointly owned property will be handled in the event of death. While some states will allow for the surviving domestic partner to automatically receive a percentage of interest in property, other states and cities specifically prohibit this inheritance unless it is documented in a legally binding will.

What you need to know about mortgages and domestic partnerships

On the surface, domestic partners go through the same mortgage pre-approval process as any other couple. Equal Credit Opportunity laws prohibit discrimination in lending based on race, color, religion, national origin, sex, marital status, or age.

Lenders look at income, credit and assets to determine whether domestic partners qualify for a mortgage. The biggest difference in the loan process relates to how domestic partners take title, and notifying the lender of that partnership to ensure the note and deed of trust are compliant with local state and city laws related to domestic partner property rights.

The agencies that provide funding, insurance and guarantees for mortgage lending include Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA) and the Veterans Administration (VA). Each of them have updated rules and guidelines related to how domestic partnerships are handled in the respective loan programs they offer, and some of the details are provided below.

Why this information is important to the lender

Besides wanting to confirm you have the ability to repay a mortgage, lenders want a clear path to collect on the debt in the event there is a default. That means they need to know the legal rights of anyone who is on title to the property.

The lender may need to modify or add addendums to a deed of trust involving domestic partners to protect their interest in the property and their ability to foreclose on the parties on title in the event of default or the death of one of the partners.

Because some states don’t recognize domestic partnerships, the death of one of the partners could trigger an acceleration clause — meaning the lender immediately calls the entire loan due, regardless of whether the surviving partner is on title to the property or not. This includes property that was owned prior to the formation of the domestic partnership.

Also, a domestic partnership may affect the way lenders look at debt in the event the relationship ends, and the partnership is dissolved. This is similar to how lenders treat a divorce, which may involve debts that were acquired before and during the relationship, and the division of those debts after the relationship is ended.

Fannie Mae and Freddie Mac domestic partnership guidelines

Fannie Mae and Freddie Mac are government sponsored enterprises that purchase mortgages to promote homeownership and a healthy market of products for consumers to get home loan financing. They purchased 44% of all newly issued mortgages through the second quarter of 2018.

Conventional lending guidelines define domestic partners as unrelated individuals who share, and intend to continue sharing a committed relationship with a borrower who signs the note. Because a domestic partnership can create legal obligations and responsibilities related to property ownership and how it is transferred between a couple, lenders have additional forms and documentation requirements to ensure the deed of trust complies with local laws.

Additional domestic partner information needed on a loan application

The standard uniform residential loan application only provides three marital status options: married, unmarried and separated. You’ll notice that in italics under unmarried, there is a long list of potential options which include single, divorced, widowed, civil union, domestic partnership and registered reciprocal beneficiary relationship.

For a domestic partnership, the correct box to mark is unmarried. However, to avoid jumping through hoops later in the mortgage process, the lender needs to be notified upfront if you are borrowing as domestic partners.

The biggest difference between unmarried couples and domestic partners when it comes to homeownership is domestic partners have more legal rights and responsibilities related to mortgages and homeownership. Domestic partners are required by law to sign legal documents indicating their ownership interest in a property and their obligations to a mortgage — unmarried couples don’t have any legal rights to property owned by their significant other.

Because of the legal ramifications of a domestic partnership, Fannie Mae created an addendum to the Uniform Residential Loan Application that requires both partners answer the following questions:

  • If you selected “Unmarried” in Section 1, is there a person who is not your legal spouse, but who currently has legal property rights similar to those of a regular spouse?

Domestic partners will answer yes to this question. The next section will request additional clarification.

  • If YES, please indicate the type of relationship and the State in which the relationship was formed.

You’ll have several options here, and you’ll want to check the domestic partnership box. If you forget to notify your lender about a domestic partnership, it could create delays prior to closing, when the lender finalize the vesting with the title company, and prepares the final closing documents.

FHA loan changes related to domestic partners

The FHA is a U.S. government agency that insures lenders who provide loans to homeowners. It is one of the most popular first time homebuyer loans, with lower minimum requirements than conventional loan programs offered by Fannie Mae and Freddie Mac.

Up until 2015, the FHA loan definition of a family member was limited to a loan applicant’s spouse, children, parents, grandparents, siblings, aunts and uncles. The definition was expanded to include domestic partners, which gives them full access to the many benefits of FHA financing.

The FHA allows flexibility to receive gifts of down payment and equity from family members, as well as allowing for family to help qualify as co-signers. Domestic partners can now qualify for some of the features reserved for family members under the prior definition.

Here are just a few of the benefits now available to domestic partners for FHA financing.

Gift funds for down payments

The FHA allows all of the funds for a down payment to be gifted by a family member. That means you can receive a gift from a relative of your domestic partner to purchase a home, or gift funds to your domestic partner.

Gift of equity to purchase a relative owned property

The FHA allows a family member to provide a gift of equity toward the purchase of a home that they currently own. That means that you could purchase a “family” home with no down payment required your own funds.

Cosigning on the loan

The FHA allows for a family member to co-borrow with an applicant on an FHA mortgage without having to live there. The co-signer can gift the down payment at the same time, giving mortgage applicants more options to purchase or refinance a home.

This gives domestic partners the benefits of income from either partner’s relatives to help qualify for a purchase.

VA loans and domestic partners

The VA loan program provides the easiest qualifying guidelines of any mortgage program offered. Active duty and military veteran borrowers can purchase a home with 0% down, and under more flexible qualifying income and credit score requirements than the FHA or conventional loan programs offer.

However, one of the major factors in how much of a down payment is required on a home loan is whether the veteran is qualifying for the loan with an unmarried co-signer. Although the recent changes to marriage law allow same-sex marriages to receive the same VA home loan benefits as opposite-sex marriages, that’s not the case for domestic partnerships.

The marriage guideline for VA

The amount of down payment a veteran makes on a VA loan depends on the amount of entitlement available based on a variety of factors including years of service, type of discharge, and branch of the military. One other factor that affects the down payment is whether the veteran is co-borrowing with a spouse or non-veteran.

Only a qualified veteran is allowed to use his or her eligibility to obtain a VA loan. A married veteran’s spouse gets the benefit of the veteran’s eligibility, and if the entitlement is high enough, no down payment is required. If the veteran is not married, and needs a significant other on the loan to qualify, the veteran’s entitlement is cut in half, and a down payment is required.

According to VA guidelines, the VA will only recognize relationships that are organized as marriages under state law. Since domestic partnerships are not considered marriages, VA financing may look at the down payment requirement as a veteran and non-spouse non-veteran co-borrowing transaction, which would require a down payment.

There may be exceptions available if you can prove that the domestic partnership meets the state’s common law marriage standards, but you’ll need to check with the VA lenders, or a regional VA office in your area.

5 ways to hold property as domestic partners

Regardless of which loan program you go with, you’ll first need to decide how you will own the partner as domestic partners. As real property increases in value, how you maintain ownership can determine whether you receive any proceeds from the sale of the property, or have any obligations to the debt.

There are primarily two ways that you can take ownership to a property — as a sole owner or as a co-owner. Some states allow for specific ownership options as domestic partners, and we’ll take at look at those vesting choices below.

Sole ownership

For married couples, the most common vesting (the way a title will be held) for an individual is married as his or her sole and separate property. This gives the person on title the benefits of ownership of the property, including the right to receive any proceeds from the sale of it, and makes them solely responsible for debts that are attached to it, like mortgages or property taxes.

California is one of the states that has a specific sole ownership title vesting designation for domestic partners registered with the state as “a registered domestic partners as his or her sole and separate property.” The partner who is not on title is required to waive all rights to the property with a recorded document called a disclaimer deed. Again, this vesting option is for California, and may not be applicable or enforceable in other states unless state law recognizes domestic partnerships.

Community property

This type of vesting gives husband and wife or registered domestic partners equal ownership in a property. That means that all decisions regarding the sale, or mortgage financing, have to be agreed to by both owners.

Community property gives each owner the right to transfer the interest in any way they want, which means if one partner dies, the other partners doesn’t receive the interest unless a separate written agreement like a will is in effect.

Community property with right of survivorship

This is essentially the same as community property, except the words right of survivorship grant the interest of a partner that dies automatically to the surviving partner without any additional legal measures.

Joint tenancy

Joint tenancy gives all parties equal ownership. The interest is not divided, which means if one party dies, it automatically goes to the surviving party.

The difference between this is and community property, is joint tenancy is mandated by the laws of the state, so one partner cannot will his or her interest to another party — it automatically goes to the surviving partner. In community property, each partner has the right to will interest to an heir or another party upon death.

Tenancy in common

Tenancy in common allows owners in a property to choose the amount of interest they want to have in a property. Unlike joint tenancy and community property, the interest does not have to be held equally, so the parties can split it out in whatever manner they collectively agree to.

This also means that any party on title can sell, will, or lease his interest to another party.

There is no specific designation available for domestic partners when it comes to tenancy in common, since it doesn’t usually apply to a domestic partnership, where committed partners are usually seeking equal interest in anything they acquire for the duration of their relationship.

Advantages of a domestic partnership in mortgage lending

There are a number of advantages to a domestic partnership when it comes to mortgage lending. Joint credit reports can be pulled, and a joint loan application can be filled out, which saves some time on the initial application.

There are also some other qualifying benefits to applying for a mortgage as domestic partners.

Additional mortgage interest tax benefits

Because a domestic partnership is not a marriage, the IRS treats the mortgage interest tax deduction on an individual, rather than joint basis. That means each each partner is entitled to the maximum interest deduction, rather than the deduction being applied to them as a married unit.

As of 2019, the maximum deduction allowed for mortgage interest is $750,000. For a married couple, that is the maximum allowed to be deducted for a qualified primary or secondary home, which is essentially $375,000 for each member of that couple.

As domestic partners, this amount is applied to each partner separately, meaning up to $1.5 million can be deducted between the two partners, effectively giving domestic partners a tax advantage over a married couple.

Disadvantages of domestic partnership when qualifying for a mortgage

There are some drawbacks to applying for mortgages as domestic partners, especially when it comes to qualifying in community property states. There are only nine community property states, and they follow the rule that all assets acquired during the marriage are considered community property.

With community property comes community debt, and that’s where domestic partnerships can add some qualifying challenges to the mortgage process.

Debt is treated the same as being married

Since domestic partnership are effectively legal agreements to a committed relationship, lenders apply that concept to how joint debt is treated. FHA loans and VA loans require that a spouse’s debt be included in qualifying for a loan, even if they are not on the loan.

One thing that many borrowers don’t learn until they apply for a mortgage is that even if they own property with no financing on it, the property taxes and insurance still have to be counted as liabilities. Some borrowers fail to disclose these properties, only to painfully learn later that there are number of quality assurance systems lenders employ to check for property ownership of both domestic partners.

Conventional loans make an exception, so if one partner has a lot of debt and poor credit, a conventional loan may the best, and sometimes the only way to get approved for mortgage financing.

Cohabitating couples avoid this problem by having the person with the stronger credit profile to apply on the loan.

Dissolving a domestic partnership may create qualifying problems

Like any long-term relationship, domestic partnerships can go bad, and decisions will then need to be made about what to do with assets and debt that were created during the relationship. This can get messy given that many states don’t recognize these partnerships, and may not provide clear guidance for property and debt disputes.

This can be problematic if one or both of the partners wants to take out a mortgage in the future, since there will be no divorce decree available to outline the division of property and responsibility for any outstanding debt. In this case, both partners may have to employ attorneys to draft an agreement that outlines the division of debt and assets.

It may be worthwhile consulting a family law attorney at the beginning of a domestic partnership to outline steps that should be followed if the partnership is ended. These agreements work like a prenuptial agreement in a marriage, and may be worth the effort to avoid costly and lengthy litigation.

Final words about domestic partnerships in mortgage lending

With the exception of VA loans, mortgage lenders look at domestic partnerships in the same way as married borrowers. There may be a bit more paperwork involved in the mortgage application, and you’ll need to make sure your interest in any jointly owned real estate is protected either by the laws of the state you live in, or by a separate legal agreement drawn up by a real estate attorney.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Denny Ceizyk
Denny Ceizyk |

Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

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How to Avoid Mortgage Scams

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Considering how heavily regulated the mortgage industry is, it’s hard to believe that mortgage fraud is actually on the rise. Yet one out of every 109 loan applications made from the second quarter of 2017 to the second quarter of 2018 contained elements of fraud, according to a report from mortgage data firm CoreLogic.

Mortgage scams are often very complicated and involve many different people that may convince you that you’re getting a great deal. The emotion tied to getting a home can often lead to impulsive decisions — which is exactly what financial predators count on.

In other cases, you may be an accomplice to a mortgage fraud scam and not even know it.

This guide will help you avoid mortgage scams — with tips to prevent you from becoming a victim or participant in mortgage fraud.

Why mortgage scams are increasing

As interest rates and home prices rise in the 2019 mortgage market, there is less mortgage business to go around. At the same time, it is harder to people to qualify for mortgages under new rules approved since the financial crisis.

With those pressures on both sides of the equation, some mortgage professionals and consumers unfortunately start looking for ways to get mortgage approvals by concocting schemes that circumvent the rules, or straight out violate them, as you’ll see from the examples that follow.

At the same time, technology and all-digital mortgages open the door for phishing scams that try to trick people to send their down payments to the wrong place.

Common mortgage scams in 2019

These relatively new mortgage scams are creating billions of dollars in losses for consumers, bilking them out of down payment money and savings without any way to recoup their losses through the normal protections of the U.S. banking system.

We’ll start with the biggest and baddest of all the new mortgage scams: wire fraud.

Wire fraud is the fastest growing cybercrime in the country, and cost aspiring American homeowners over $1.4 billion in 2017, according to the FBI. In June 2018, the FBI launched a major law enforcement effort, making 42 arrests in the United States, thwarting the theft of nearly $14 million in fraudulent wire transfers.

This scam is very sophisticated, and it’s important you understand exactly what to look for and how to avoid falling victim to this ongoing problem in the real estate and rental sectors of the housing industry.

Five steps to avoid becoming a victim of wire fraud

Once your loan is approved and you’re getting near the contract closing date, you’ll be begin to receive correspondence about where and how to send your down payment and closing costs. Many borrowers will opt to prepare a cashier’s check with their local bank — the safest way to eliminate any possibility you’ll be the victim of wire fraud.

But if you prefer to avoid the extra trip to the bank, or if you only bank online, wiring your money will be your only other option. Your funds will need to go to the title company handling your purchase escrow.

For a purchase financed with a mortgage, the lender will request wiring instructions directly from the title company. The wiring instructions contain information about your escrow, including an escrow number specifically tied to your transaction, with routing instructions for the funds to be deposited into the title company’s account.

Hackers always bypass your lender with wire fraud scams, choosing to hijack the title company email or the realtor email, since they often are in touch with you about the amount needed for closing. A title company will rarely, if ever, give you wiring instructions that aren’t encrypted.

In fact, many title companies will have you set up a user ID and password as part of their communications involving any transaction documents you’ll need to review. If you start receiving correspondence with attachments that you can open without your user ID and password, chances are the email is fraudulent.

Nonetheless, the stress and sometimes hurried nature of last minute scheduling changes is what wire fraudsters count on — that one moment you open an email and click through without making sure the source is legitimate. Once the money is gone, there’s no getting it back.

Below are five steps you can follow that will prevent you from falling victim to wire fraud.

Step #1 :  Never respond to emails giving you wiring instructions

You may get an email that looks just like a legitimate email from your realtor or escrow officer, with wiring instructions you’ll need for your upcoming closing. In most cases, the realtor or the title company’s email is either hacked, or the fraudster assumes the identity of the real estate agent or title agent handling your loan.

Step #2 : Verify the phone number in a public directory

Don’t rely on the contact information in the email. In most cases, the correct contact phone number for the title officer should be in your purchase contract. Use that as a first line of defense, and then use an online directory as a back-up to make sure your actually calling your title officer and not a scammer.

Step #3 : Call your realtor or title officer to confirm if they sent the email

Realtors don’t usually provide wiring information in a financed purchase transaction. Even if you are paying cash, the wiring information should reference the property you are buying, with an escrow number related to your transaction. Again, you shouldn’t be initiating your funding wire until you have signed your closing papers and verified the wiring instructions face-to-face with the attorney or escrow officer handling the transaction. If the email is pressuring you do to that, chances are it’s a bogus request.

Step #4 : Confirm the wiring instructions your lender is using

Mortgage lender closing departments work directly with title companies to verify where the loan proceeds of a mortgage should be deposited. Check the wiring instructructions you received in the email against what your lender provides — if they don’t match, the email is probably a scam.

Step #5 : Don’t send a wire until you have verified the information at the signing with someone face to face

There is rarely a reason to wire funds for a purchase transaction before you have reviewed and signed the closing papers. It’s also a good idea to withhold the money until you’ve confirmed that all of the closing figures are correct and reflect the terms you agreed to in your purchase contract. If you’re taking out a new mortgage, you also want to make sure the final closing disclosure reasonably matches the initial loan estimate.

Of all of the mortgage scams, this one has the potential to cause the most financial damage with the least amount of legal recourse. In many cases, the money is wired overseas, and U.S. law enforcement has less jurisdiction to recover money overseas than within the U.S.

The FDIC insurance protections that safeguard money you have on deposit in your bank account don’t apply to money that you wire. You have several options before hitting the send wire button to verify and re-verify the accuracy of the information, so once you hit the submit button, you’ve effectively certified that you did your due diligence to check the authenticity of the wire source.

Disaster-related home repair scams

In the wake of damage related to Hurricane Michael, which hit Florida in October 2018, distressed homeowners had to deal with a new peril: hurricane relief scams. These range in scope from repair-related scams to impostors posing as FEMA inspectors to “help” homeowners with flood claims on their properties.

The problem is only likely to get worse, as a recent storm surge prediction report puts nearly 6.9 million U.S. homes at risk of damage from future flooding. If the predictions are accurate, total reconstruction costs is estimated to be more than $1.6 trillion.

Just like scammers preyed on homeowners trying to save their homes from foreclosure during the housing crisis, they are now plotting complex schemes to take advantage of homeowners affected by natural disasters.

If you have experienced a hurricane-related loss, or know someone in one of these areas, knowing the signs of a disaster mortgage fraud scheme can help save them the heartache of spending money on an illegitimate repair company, or giving all your financial information to someone posing as a FEMA home inspector.

How this scheme usually works

Communities hardest hit by natural disasters may have seen large disruptions in employment, resulting in financial hardship. Financial records may also have been destroyed in the disaster — leaving homeowners without contact information for their lenders and making them vulnerable to impostors. These fraudsters may pose as lender representatives promising mortgage assistance programs that are little more than fronts for illegal schemes.

Others create official looking identification and pose as FEMA inspectors, requesting social security numbers, dates of birth and other information that is then used by the identity thief to open new credit and make the hurricane victims life even worse. They may even demand payment for inspections up front, which is something FEMA.

Contractors may show up or call indicating they are there to help with repairs, or offer discounted repair services promising to waive deductibles. Never, ever sign any paperwork from these contractors unless you initiated the claim with your company, especially if they indicate they will work with your insurance company to pay for your repairs.

Anyone who has lost financial records related to a home loan should have a credit report run to obtain the contact information directly from the credit bureaus. Equifax, Experian and Transunion will list the contact numbers of all creditors on a credit report, allowing you to make contact with them to let them know about your hardship.

Creditors will never send someone to your area to negotiate debt during a crisis, and you should never speak to someone about anything related to your credit unless you can verify the source of the call. In every case possible, make sure you’re the one who initiates the call, using contact information you already have on file or obtained from your credit report.

This includes anyone offering mortgage modifications, foreclosure rescues, home repairs or reverse mortgages to fix your property after a disaster. If you don’t do the research and seek the company out based on a website or local business office you can visit, don’t give any personal information until you can verify who you are talking to.

Mortgage rate bait and switch

These scams are not really new and not necessarily illegal, but they are considered unethical. They are likely to be more frequent in a market where more loan officers are vying for fewer mortgages in a market with very little refinance business.

In most cases, bait and switch scams are accompanied by high pressure sales tactics to get you to stop shopping around for a mortgage. You are likely to get multiple calls at all hours of the night and day as the loan officers try to get you to use their services over someone else.

You may also get an initial loan estimate that has much higher fees and rates than other lenders you’ve received, only to be told they’ll match any rate or cost quote you receive in writing from a competitor. If you’ve experienced any of these tactics from a loan officer you’re speaking to, it might be best to cross them off your list of potential lenders to work with.

Quoting a best case rate

A lender may advertise a rate that assumes their future customer has a very high credit score, a very high down payment, and a large loan amount (usually $250,000 or more). It may also be a “buy-down” rate, costing thousands of dollars in points and origination fees, an adjustable rate, or even a short term rate like a 10-year or 15-year mortgage.

Rates vary by state, so national lenders may quote an interest rate that is only available in particular area of the country. Most quotes also assumes you are buying a single family residence that you will live in as your primary residence, so if you’re buying a condo or a manufactured home, the price quote will not be accurate.

Here are a few warning signs and steps you can take to avoid falling victim to this scam.

#1  Understand that fewer questions may equal surprises later

If you aren’t being asked very many questions about your income, credit or the type of property you’re looking at when you’re shopping around for a mortgage, chances are pretty good the final rate quote will differ significantly down the road. All lenders have “loan level price adjustments,” which means FICO scores, down payments, debt-to-income ratios and the type of property can all increase the costs and final interest rate that is applicable to your rate.

#2  If it sounds better than everybody else’s rate, ask for a written lock in agreement

Just like everything else in real estate, nothing is legally binding until it’s in writing. If a lender is quoting what looks like an outstanding rate that obliterates the competition, the best way to verify if it’s the real deal is to ask for the rate to be locked and get written confirmation.

The classic sign of a bait and switch will be a somber phone call from an apologetic loan officer informing you of a sudden change in the market, or that an underwriter needs to review your package before it can be locked. If they can’t deliver the price they first quoted, chances are you’re in store for more changes and excuses as to why the final rate and fees end up higher.

#3  Watch for an upfront non-refundable fee for locking in

Lenders are not allowed to charge you a fee to provide a price quote, but once you give them the OK to proceed with the loan, they can charge you an application or processing fee. Although it’s not uncommon to pay upfront for a credit report and appraisal, an application fee or non-refundable processing fee may be a red flag of a pending bait-and-switch.

The basic idea is you won’t want to switch companies if you’ve already got some upfront money into the transaction, and will reluctantly stick with the lender, not wanting to start over and risk not closing on time, or missing a lock expiration.

#4  Be suspicious if the lender tells you don’t qualify for the original program you were quoted for

An investor may have unexpectedly exited the market, or suddenly changed their guidelines and the best pricing requires a higher minimum loan amount. Those are just a few more reasons a lender may notify you of a switch to a higher priced loan, after baiting you with a cheaper one.

Some other common mortgage scams and how to avoid them

Despite the number of warnings and articles written about the following mortgage scams, many people still fall victim to different spins on them.

A common one involves scammers presenting themselves as “alternative lenders.” They often advertise to people with poor credit, with the false hope that their specialized loan programs will allow them to get pre-approved for loans the “big banks” can’t provide. In many cases, they are simply fishing for big upfront fees, or in the worst cases, they are identity theft rings looking to open new credit and deplete what remaining resources their victims already have.

The table below lists some more of the most common mortgage scams, who the fraudsters focus on, the basics of how they work, and quick tips to avoid them.

Mortgage scam typeWho it targetsHow it worksHow to avoid it
Reverse mortgage repair scamCurrent or future homeowners 62 and olderContractor creates urgency to do work, and recommends or teams with a loan officer who recommends a reverse mortgageGet second opinions about any proposed work, and shop for your own mortgage company
Reverse mortgage property flip scamCurrent or future homeowners 62 and olderRealtor and/or lender convince senior to buy a fix-up property using reverse mortgageJust say no. This is not something reverse mortgages were designed for
Reverse mortgage market investment scamCurrent or future homeowners 62 and olderFinancial planner recommends taking out equity in lump sum to invest in marketJust say no. Cash should be used for home repairs, living expenses or to cover unexpected medical expenses
Home improvement scamsDistressed homeowners with homes that have deferred maintenance (infrastructure repairs that been postponed due to budget concerns)Contractor comes to your home with a free quote for repairs, and then recommends major renovationsYou should initiate any requests for repair estimates from a reputable licensed contractor
Foreclosure rescueAnyone having trouble making paymentsAttorney’s office or company solicits home rescue options for an upfront feeNever, ever pay an upfront fee for any foreclosure rescue service. Your current mortgage company and local non-profit agencies will do this for free
Transfer of mortgage servicing scamsAnyone with a current mortgageA company calls or send something in the mail indicating your mortgage payments are to be made to a new companyAlways call your current mortgage company, using your current mortgage statement to verify contact information for any transfer of servicing notices.
Government endorsed loan program scamsAnyone looking for a mortgage or who currently has onePop-up ads, phone calls, or website ads talking about government, current President of U.S., or other federally endorsed loan programsIgnore the ads. Government loan programs are provided by licensed mortgage lenders. Verify the license of the company and their contact information through the Consumer NMLS link.
VA interest rate reduction churningAny veteran with a current VA loanCompanies encourage repeated interest rate reductions of VA loansVeterans should demand a cost break-even, and get a second opinion for any refinance they are pursuing.

How to keep from committing mortgage fraud

Now that we’ve talked about fraud targeting consumers, now it’s time to address the flip side. According to a recent report from Corelogic, the biggest increases in mortgage fraud on loan applications relate to buyer misrepresentations of occupancy and income. That means more consumers, perhaps with the influence or coaching of a housing professional, are lying about whether or not they plan to live in a house as a primary residence, or are making up the income being used to qualify for mortgages.

Primary occupancy fraud

The most common reason for committing occupancy fraud is so a borrower only has to make a minimum down payment. FHA loans and VA loans allow down payments of 3.5% and 0%, respectively, but they also require the property be a primary residence.

Investment properties and second home purchases require higher down payments at higher interest rates with more closing costs. Perpetrators of occupancy fraud on government loans may not realize that lenders reserve the right to conduct occupancy inspections for up to 12 months after a government loan is made.

If the inspector shows up and someone other than the original borrower is residing there, the next knock on the door could come from an FBI fraud investigator.

Reverse occupancy fraud

This is a relatively new phenomenon characterized by buyers with large down payments who say they’re buying an investment property, but turn around and live in them as primary residences. This scheme takes advantage of the fact that current lending guidelines allow market rent on an investment property to be used as qualifying income, even if there is no current tenant or lease on the property being purchased.

This is most frequently found in high rent cities like New York City, where houses have appreciated quickly and market rents are very high, creating much higher qualifying income than would be found in suburban areas of the country.

Income fraud

Income fraud schemes can be as simple as getting an employer to provide a bonus at an opportune time, or manufacturing tax documents and paystubs.The latter comes with enormous risk, considering tax records at most lenders will be matched against what is filed in the IRS database.

Lenders employ entire staffs of quality assurance personnel and use third-party fraud detection companies to track irregularities in income. According to Corelogic, income fraud risk rose 22% in the second quarter of 2018, most likely due to borrowers feeling squeezed by increasing prices and higher interest rates.

Undisclosed liabilities fraud

Credit reports make this relatively unlikely, but some examples of this are not disclosing a property owned because it has no mortgages on it, or child support or alimony that is not court ordered. Not disclosing something on a loan application is considered “fraud by omission,” and is considered just as serious as intentional fraud.

Final thoughts about mortgage scams

In the aftermath of the housing meltdown, federal and state laws were passed to more severely punish anyone committing mortgage fraud. The ripple effects of mortgage fraud are felt by entire families, neighborhoods and communities for years, and sometimes the damage is permanent.

The current penalty for mortgage fraud is up to 30 years in prison and up to $1 million in fines — it’s just not worth it.

If you believe you’ve been a victim of a mortgage scam, or feel like you are being pressured into participating in any type of mortgage fraud by a housing professional, family member or friend, you can contact the following regulators for guidance:U.S. Department of the Treasury Financial Crimes Enforcement Network: Provides a list of regulatory agencies to contact regarding all types of fraud and complaints, including mortgage fraud.

FDIC: Has valuable information tips and a guide to what to look for with foreclosure rescue, modification and mortgage delinquency scams.

USA.gov: Provides for avoiding moving scams, including how not to get taken advantage of by moving companies, which may come in handy for first time home-buyers.

The Department of Housing and Urban Development (HUD): This link provides contact information for a network of non-profit housing counselors all of the country who can provide objective, non-sales driven opinions about any mortgage scam or fraud concern you might have.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Denny Ceizyk
Denny Ceizyk |

Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

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Mortgage

Should I Get a Digital Mortgage?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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It seems so easy: Just download an application on your smartphone, spend 10 to 15 minutes inputting some information, and in minutes you’re pre-approved for a loan to buy a house. Digital mortgage products are coming to a neighborhood near you, but not all digital mortgage platforms are created equal.

“There’s a mix of lenders right now,” said Tendayi Kapfidze, chief economist at LendingTree. “There are some lenders that have an almost completely digital process, and some lenders who have a partial digital process. But, ultimately, the industry as a whole, from application to underwriting and processing the application, is moving toward a digital structure.”

For some borrowers this could mean a much faster process with fewer documents — but it’s important to understand how the digital loan process works before you decide if you should get a digital mortgage.

What is a digital mortgage?

There is no uniform definition of a digital mortgage. Some lenders have digitized only the initial application process, while others have streamlined the processes to the point where borrowers need to provide little more than an initial application and e-signatures — the rest of the verification is done automatically.

According to a recent survey by Fannie Mae, the primary reason that consumers want a digital mortgage experience is to reduce the amount of paperwork they have to provide. Because mortgages need to verify their borrowers’ income, assets and credit, it’s not uncommon to provide dozens, if not hundreds, of pages of documents to obtain a final approval.

All of the regulatory changes of the past decade have resulted in new mandatory forms that can easily bring the total page count of an initial loan package to 80 pages or more. Being able to e-sign can save printer ink, paper and above all, time and paperwork stress overload.

Here we’ll discuss how the different parts of the loan process have been digitized, and what you can expect from each.

The digital loan process

The digital mortgage approval process is not that different from the standard process of getting pre-approved for a home loan. Your income, credit and assets still need to be verified; the lender still has to determine the market value of the house you are buying; the title officer still needs to review the ownership history to make sure you can take possession of the home without any problems.

What’s different is how much paperwork, if any, you’ll need to provide to complete your loan.

The digital loan application

Most loan officers will be able to give you access to a link to apply for your mortgage online. The lender will be automatically notified by email when the application is finished, and the loan officer can often provide you with an automated approval decision within minutes of the completion of the application.

You may be able to fill out the application from a smartphone, but in most cases it will be easier to complete the loan on a desktop or laptop. Many digital loan application sites will also give you the option to begin uploading initial documents like paystubs, W-2s and bank statements, so the loan officer can give you a solid pre-approval.

A growing number of lenders actually have a dedicated app that you can download to your smartphone to fill out the application quickly. Some of the apps will allow you to access data about the status of your application, so you know what’s going on at every step of the loan process.

Digital disclosure signing

Once you’ve shopped around for your mortgage loan and found a company you want to work with, they’ll send you loan disclosures. These include a loan estimate that outlines the preliminary costs of your loan, as well as the interest rate and monthly payment.

Besides the loan estimate, you will need to review several other federal forms, and there may be disclosures specific to the type of loan you are taking out. Some states have forms as well. You can scroll through and read each document, and once you’re done, e-sign the documents to let the loan officer know you wish to proceed with the full processing of your loan approval.

Digital loan documentation gathering

Once your loan officer has provided you with an automated pre-approval, you’ll need to provide all the documentation that is required. Most often, this will require at least a current paystub and W2, and a current bank statement.

Depending on who you bank with, and how large your employer is, some lenders may be able to access your information through your employer’s automated employment services platform. They might also be able to access your banking information through a digitized platform that gives them access to your bank balances and transaction history.

In a perfect digital world, this could mean that you wouldn’t have to provide any income or asset documentation at all to be approved for a loan.

Digital communications throughout the process

You can expect to be notified by email or text, or both, throughout the process in the digital mortgage lending world. Messages may include correspondence directly from the loan underwriter regarding any items outstanding with your approval, as well as milestone updates on the closing timeline, and any pending deadlines like your contract closing or lock expiration date.

Many of the new digital apps will allow you to check on the status of your loan in real time, with the same access to the loan information that is provided to the loan processor.

Appraising your home the digital way

Fannie Mae and Freddie Mac have re-introduced an option that allows for a loan to be approved without a full appraisal. If your property receives a Fannie Mae property inspection waiver (PIW) or a Freddie Mac automated collateral evaluation (ACE), you may not need to have an appraisal.

That’s great news for a few reasons. First, obviously, is the savings of $350 to $700 on the appraisal fee. Second is not having to wait the 7 to 10 days it can take to complete a traditional appraisal, which requires an inspector to evaluate not just the property you are buying, but comparable properties, while condensing the findings into a 40-page report called a uniform residential appraisal report (URAR).

Title work the digital way

Title insurance is required on any mortgage loan to protect the lender, and ultimately you, from claims against the property you are buying due to claims against a prior owner. Like all of the other digital processes, lenders have begun offering a digital version of title work.

Not all title companies are participating in digital signings, and the title company has to have special authorization to perform extra due diligence since you’ll be signing without being present in person — creating an addition layer of fraud risk for the title company.

The digital closing process

The digital closing disclosure process is very similar to the digital loan estimate disclosure process. The only difference between the loan estimate and the closing disclosure is that the loan costs are finalized, and once you’ve signed a closing disclosure, very few changes can be made.

Once the closing disclosure goes out, most lenders still require you to sign in person at a title company, in front of a notary, and provide a picture identification to an attorney or escrow officer who will witness your signature on the loan documents. Once the package is signed, the lender sends the wire of the loan funds, and the property records into your name and you receive your keys.

The digital closing allows you to sign the entire package electronically. That means you can sign wherever you are with e-signatures, and once the signing is complete, the lender funds the loan and authorizes the recording of the property into your name, and you officially become a homeowner.

When a digital loan makes sense for you

Digital loans hold a lot of promise for borrowers who have simple income, work for a large employer, and keep at least an amount equal to their down payment plus closing costs in the bank. Here are some characteristics of borrowers that will benefit the most from a digital mortgage experience.

Stable salaried or hourly income

If you’ve been on the job for two years and have stable or moderately growing income, the automated system will very likely only require a current pay stub. If you work for an employer that uses a third party employer verification system like “The Work Number,” it’s very possible you won’t have to provide any income documentation at all.

Down payment in the bank for two months

If you keep an average balance in your account that is about equal to what you’ll need for your down payment and closing costs, the automated system may only require a current bank statement. If you use a large national bank, some digital lenders may be able to access your balance and transaction history, and not require you to provide any bank statements at all.

Good credit

The higher your credit score is, the more likely you are to have very few conditions required by the automated underwriting system.

You are buying in a strong real estate market

If values in the area you are buying are steady or increasing, and you are making at least a 20% down payment, it’s very likely you won’t need an appraisal. The automated system can track recent closed sales from public records and if the property you are buying is priced within a reasonable range of those sales, you may be eligible for the appraisal waiver.

You are taking title individually

As long as you aren’t taking title in a trust or some type of business entity like an LLCs, the digital title option should be the simplest possible.

When you shouldn’t get a digital mortgage

If you’ve got income, credit or down payment challenges, lenders may end up having to take a more traditional approach to your loan approval. You’ll probably still be able to e-sign most of your documents, but other parts of your process will require more work and documentation on your part.

Income fluctuations and employment instability

If you’re new on the job, have had more than three jobs in the last two years, or have had large fluctuations in your income, you’ll need to provide extra documentation and explanations in order to obtain a final approval.

The same is true if you are self-employed — more than likely you’ll need to provide tax returns and profit and loss statements to show your income history and how the income is flowing currently. Commission, bonus and fixed income like retirement and Social Security may also require additional documentation.

Large deposits or gifted down payments

If you’ve recently deposited a large sum of money into your account, or are getting a gift for your down payment, the lender will require additional documentation for your approval. This will likely include a letter of explanation for where the funds came from for large deposits, and a paper trail of gift funds including a gift letter, and proof the donor had the funds on hand to gift to you.

Retirement fund liquidations, 401k loans or the sale of a vehicle for a down payment will also require additional documentation.

Credit issues

Low credit scores, or major derogatory events like bankruptcies and foreclosures, will require much more documentation and explanation, and may even require an exception by an underwriter to obtain approval.

Any of the above is likely to trigger a full appraisal requirement

If credit, income or down payment sources are challenging, more than likely the lender will require a full appraisal inspection. The lender will want to make sure the collateral for their loan is more solid, if they are making a loan to a borrower that has a higher risk of defaulting due to weaknesses in other parts of their loan application.

There are also property types that may trigger a full appraisal requirement, such as condominiums, multi-family properties, and any type of fix-up property. Keep in mind if you start off looking at single-family-residence and you are approved for an appraisal waiver, but end up buying a condo or other type of property, you could end up having to pay for an appraisal to finish the loan.

How to have a positive digital mortgage experience

There are a number of tips that will help improve your digital mortgage experience, as long as you’re prepared to do a little more work to fill out the most accurate and complete loan application possible. Although you may need minimal documents to close your loan, there are still a number of checks and balances the lender will make along the way, and any discrepancy from the information you provide could trigger a request for additional documents.

Here are a few things to watch for:

Provide accurate employer information and employment dates

Since digital mortgages are checking information against your employer’s database, you’ll need to make sure you provide accurate contact information, and start and end dates for the last two years of employment.

Be sure to use pre-tax income for your monthly pay — if there is a substantial difference between the pay you list on your application and the amount that is digitally verified, you could end up having to provide more income documentation and explanations for the difference.

Only add banking information for accounts you’ll use for your down payment and costs

If you have other asset accounts that aren’t needed for your down payment or closing costs, don’t list them on the application. Cash value life insurance accounts, IRAs or 401ks are only needed if you will be drawing money from them for your down payment.

Advantages and disadvantages of a digital mortgage

The table below provides a side by side comparison of the advantages and disadvantages based on the different parts of the loan process. Not all lenders are offering a fully digital experience, so use this table as a reference point when you’re talking to lenders about the digital process they currently offer for mortgage lending.

Digital loan processAdvantageDisadvantage
Loan applicationFaster decisions and ability to upload documents with initial applicationMay have compatibility problems with different devices and browser issues as well
Loan shoppingCompletely digital, with quick decisions and fee sheets generated by multiple lendersRequires the same information be input each time — any discrepancies in input could lead to inaccurate rate quotes
Loan documentationMay require little to no documentation, depending on employer and current bankAny variations in income stability or asset balances may trigger additional documentation requirements
Appraisal waiverMay not need an appraisal at allYou don’t get the valuable market information provided by a full appraisal
Digital title preparationAllows for e-signing of closing documentsLimited number of title companies participating means you may lose choice to shop for competitive rates
Closing document preparationStreamlined e-sign process means less signatures and a faster closing processAny changes to program, property, loan amount, price or closing costs could result in a traditional mortgage closing process
Final signing and closingMay allow for e-signing of closing documents, including deed of trust and noteLimited number of companies offer, and potential for identity theft since borrower signatures are not witnessed by someone in person

Final thoughts and conclusions

Although computer algorithms and digital processes can simplify the mortgage approval process, it’s not likely artificial intelligence will replace the value of a human loan officer. There are simply too many different chapters in most people’s financial histories, and although digital mortgages hold promise for a simpler process for the most qualified borrowers, anyone who has had bumps in their financial road will still benefit from a combination of digital improvements and the guidance of a knowledgeable loan officer.

One final caveat about digital mortgage lending: Be sure to check on the credentials of anyone you’re talking to if you’re only looking at online lenders. Applying for a mortgage requires you to provide more personal information than any other loan transaction you will make in your lifetime.

That means that hackers and identity thieves will go to great lengths to get access to your information by advertising themselves as digital lenders or loan officers. You should always verify the license of both the company and any loan officer you are talking to by going to the Nationwide Multistate Licensing System (NMLS) consumer access page — if an online lender contacts you first, ask them for a phone number to call them back, and verify it before you start giving them any financial information.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Denny Ceizyk
Denny Ceizyk |

Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

TAGS:

Compare Mortgage Loan Offers for Free

Home Purchase Quotes

Home Refinance Quotes

(It only takes 3 minutes!)

NMLS #1136 Terms & Conditions Apply