March 10, 2011
The FHA issues warnings to consumers about predatory lending, but many people don’t know what predatory lending practices are until there’s a string of headlines about one specific type of activity. Protecting yourself against fraud and unethical practices in the real estate business is much easier when you know what to look for.
It’s not that the real estate business is rife with dirty tricks–it likely suffers from the same amount of fraud as any other major industry–but the stakes are obviously much higher when it comes to buying a home.
That’s why the FHA has requirements in place to protect the borrower. Look at the types of fraud sometimes found in the marketplace and compare the FHA rules to those governing other types of loans and you’ll see a consistent pattern in FHA requirements.
Type of fraud: Selling properties for more than they are worth by inflating the price with bogus appraisals.
The FHA protects borrowers from this practice by requiring FHA-approved appraisers who are not hired or retained by a commissioned sales person who stands to profit from the deal in question. In addition to this rule, the FHA has an active complaint and investigation process that can be used if the borrower suspects prohibited activity in their transaction.
Type of fraud: Knowingly approving loans for more than a borrower can afford to repay.
The FHA requires verification of income which must be reported in writing as part of the FHA loan underwriting process. If the debt to income ratio on an FHA borrower’s application is above the limits spelled out in FHA regulations, the lender can’t issue the loan.
Can a lender still try to fudge the numbers? Technically speaking, yes. But the paper trail of evidence telling the real story is easier to follow than you might think once the application process is complete.
In our next blog post we’ll examine how the FHA protects FHA loan applicants from charging for non-existent services or products.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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