If you're like most homebuyers, you'd rather undergo a root canal than be painfully interrogated by the lender when applying for a mortgage loan. What IS the lender trying to uncover and why is it any of his business?

While many of the questions may appear abstract and invasive, each question has a meaning to its madness.

For example, uncovering your assets (including personal property) shows that you've been disciplined enough to accumulate items of value and wealth. And if you've received wage increases each time you've changed employers, its another positive that you've bettered yourself financially in your chosen profession.

But what about lender requirements asking you to provide true and original copies of your tax return (signed, of course) or a letter from your CPA on original letterhead mean? Do requests like these have anything to do with your character or financial ability as a buyer? Perhaps not, but they do have a role in curtailing mortgage fraud.

Increases in mortgage fraud are, in part, due to the fact that it has become much easier to perpetrate. One example, as offered by an Indiana company last year, was the ability to provide you with a new identity for less than twenty dollars! It would provide you with a new name, social security number, picture ID and a major credit card.

Additionally, new and creative forms of financing, coupled with automated underwriting can potentially compromise due diligence. Add this to low-cost computer equipment, printers and copy machines that produce state-of-the-art copies, and you've got a 21st century recipe for mortgage fraud.

Lenders look for mortgage application red flags in four major areas:

1. Falsified sales contracts: Lenders check, and double-check with whom they're doing business. Are the applicants on the mortgage loan really the people who signed the Purchase Agreement? And if any addenda or additional contracts apply (like a lease-purchase agreement ending in a purchase) are the parties the same?

2. Falsified applications: This is a paramount area of concern for lenders since approximately 35 percent of all red flags on mortgage applications are due to blatant inconsistencies. The lender is constantly asking, do the facts on this application make sense? For example, if someone owns a quarter of a million dollars in securities yet has failed to save $100 in a savings account, the circumstances warrant a second review for clarification. Unfortunately, the assets could come from drug money, another illegal source, or an undisclosed gift.

3. Falsified appraisal values: Appraisals are important to lenders and to the secondary market where loans are sold. Unfortunately, appraisals can be falsified -- which is why lenders select appraisers and not buyers or sellers.

4. Falsified occupancy: This is a growing concern, The scam here is that to get a lower rate, downpayment, or closing cost package buyers may falsify their primary residence claim. In fact, the new home is really a vacation property, something which represents more risk to lenders than a prime residence.

So keep in mind that when lenders ask you to provide tax returns, your mother's maiden name or even show your birthmark, they're just helping control mortgage fraud which should, in turn, save you money on your mortgage!

Published: January 8, 2001

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Julie Garton-Good, DREI “The Frugal HomeOwner™” As a syndicated newspaper columnist, author and international speaker, Julie Garton-Good DREI, C-CREC™, is called “America’s Home Affordability Expert”, addressing more than 25,000 persons annually on topics of real estate industry trends and home affordability. She is the author of five real estate books and is the sole two-time recipient of the international "Real Estate Educator of the Year" award from the Real Estate Educators Association. In 1997, The National Association of Realtors® nominated Julie as one of the fifty most influential people in the real estate industry. She shared the list with only three other women.