Low doc Borrowers Hiding From Irs

(Over the past several years, nontraditional or “exotic” mortgages have increased in popularity due to their alternative payment options and looser lending guidelines. )

These optional mortgages were originally implemented to help families and households with specific financial needs to obtain a home.

One of the most popular mortgage options has become the “low-doc” mortgage plan, which allows borrowers to obtain a mortgage with little to none of the required background information required in traditional mortgage underwriting.

Kenneth R. Harney’s article, “Do ‘Low-Doc’ Home Mortgage Borrowers Have Something to Hide?” published November 27, 2006 on Realty Times, explains how this type of mortgage program has been taken advantage of to elude the IRS.

Reduced or low-documentation loans were originally used by small business owners and with intricate and complicated corporate profiles and unconventional income patterns.

“Documenting income and assets for them was a big hassle and they welcomed loan programs that allowed them to simply demonstrate that they had good credit histories and adequate real estate collateral -- even if they paid a slightly higher interest rate for the mortgage.”

But a recently released study conducted by Inside Mortgage Finance, an industry trade publication, suggests that a growing number (one out of every six) of today’s “low-doc” borrowers are taking out these mortgages in order to deceitfully hide from the IRS. “Low-doc” mortgages currently account for 16 percent of all mortgage originations nationwide.

“They may assure the loan officer that they got $150,000 a year in annual income and can afford a big mortgage on a big house. But they only report $75,000 in income on their federal tax filings, and they don't want anything on the record that might alert the IRS.”

What is the most alarming finding of the study is that the majority of “low-doc” borrowers are not self-employed individuals or small businesses, for which the mortgage was intended.

“Thirty-nine percent of all low-doc borrowers are salaried wage-earners who could easily produce a W-2 form if required. That's the identical percentage as self-employed borrowers.”

“When brokers were asked why their clients chose the low-doc route, more than 70 percent of them said a ‘significant’ reason was that part of their income came from ‘a household member with poor credit.’ As an illustration, say Mr. and Mrs. Jones earn a combined $8,000 a month. Mr. Jones earns $6,000 of that, and Mrs. Jones earns $2,000. But Mr. Jones has a rocky credit history and very low FICO scores.”

A traditional mortgage would insist that Mr. Jones’ credit score account for 75 percent of the determined rate since he earns 75 percent of the household income. This would have resulted in a significantly higher monthly payment.

“Nearly two-thirds of brokers said a significant number of their clients were ‘self-employed with unreported income,’ and 45 percent said their self-employed clients had ‘not filed tax returns.’”

“Low-doc” mortgage have higher rates because they allow for less strict underwriting, but should not be used illegitimately. They are supposed to be used as a helpful tool, not a cloaking device.

“Tom Popik, principal of Geosegment Systems of Nashua, New Hampshire, who designed the study, said ‘it's pretty surprising how many (low-doc) borrowers are hiding income’ from the IRS. The entire study, added Popik, shows that ‘there are significant risk factors’ in many low-doc mortgages -- not simply for lenders and investors, but for the borrowers themselves and the realty professionals who assist them.”

Risks associated with “low-doc” mortgages are hefty enough but expect governmental watchdogs to start cracking down on these borrowers looking to dupe the IRS.

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