First Time Home Buyer Tax Credit Fraud

There are many of us involved in the real estate industry that have been signing petitions and writing blogs about extending the First Time Home Buyer Tax Credit.  We have been stating how great it is for the housing market and all kinds of other positive aspects of the credit.  Well, the IRS dropped a major bomb on us this week, the IRS is investigating more than 100,000 “doubtful” claims of the tax credit intended for First Time Home Buyers.  The IRS is also investigating 167 “criminal schemes”.  Lawmakers are concerned that a significant number of the First Time Home Buyer Credits may be fraudulent (IRS News).

 A Jacksonville tax preparer has already pleaded guilty to falsely claiming the First Time Home Buyer Credit on customer’s tax returns (Busted!).  If you read the article, you will find out that the tax preparer was on probation for forgery and indicted on 35 counts of tax fraud (15 of those for FTHB tax credit).  The preparer took $1000 from each customer, entered a false address and told them they qualified because they worked two jobs.  For those of us who pay attention, this scheme is laughable, but at least 15 people fell for it!

More than 19,000 people filed 2008 tax returns claiming the credit and had not yet purchased a home.  74,000 people claimed to fit the FTHB credit criteria, but had previous ownership in the last 3 years.  The examples of fraud with this credit are numerous (Disturbing).

I get really irritated when I read these types of articles because I had supported the idea of extending the credit because of the First Time Home Buyers that I have worked with that are looking forward to using the credit to make improvements to their homes.  Now I am second guessing myself, is the risk worth the reward?  Is there another way?  I am not naïve enough to think that fraud will stop if the credit is not extended, I would just hope that better control mechanisms would be put in place to minimize future fraud.  DPA anyone?

1. Thou shalt not change jobs, become self-employed or quit your job.

2. Thou shalt not buy a car, truck or van.

3. Thou shalt not use credit cards excessively or let your accounts fall behind.

4. Thou shalt not spend money you have set aside for closing.

5. Thou shalt not omit debts or liabilities from your loan application.

6. Thou shalt not buy furniture or any other big ticket item that requires financing.

7. Thou shalt not authorize any inquiries into your credit.

8. Thou shalt not make large deposits without first checking with your loan officer.

9. Thou shalt not change or close bank accounts.

10. Thou shalt not co-sign a loan for anyone.

What is FHA?

I would like to clear up one of the biggest misconceptions in the mortgage industry. FHA is not a lender, they are an insurance company. I can’t tell you how many people do not know this.  Here is a basic acceptable working definition:

Federal Housing Administration (FHA): Federally sponsored agency chartered in 1934 whose stock is currently owned by savings institutions across the United States.  FHA is a federal agency that provides mortgage insurance for residential loans with very low down payments (3.5% or $100 depending on the loan program). The borrower is required to pay the insurance premium monthly and the lender is the beneficiary. In the event of a borrower defaulting on their loan, FHA will pay the lender an amount covering some or all of the outstanding loan balance. Although FHA does not lend the mortgage money, it does set underwriting and construction standards for the lenders.  The lenders can and usually will have additional underwriting standards.

It is important that everyone associated with the real estate industry understand this definition.  This will give some insight into the constantly changing underwriting guidelines that we have encountered as of late.  Many people are frustrated with lenders raising their FICO/overall credit requirements and often point out to me that FHA doesn’t have a fico requirement or that the automated underwriting decision was an “accept”.  I realize this, but we must understand that FHA doesn’t lend money.  That is why the argument that FHA doesn’t require a specific guideline is not as effective as it used to be.  The lenders still need to guard against high levels of delinquency and default.  They do this by adding additional requirements to the basic standards to reduce the risk based on their past experiences with a borrower profile.

The next time you begin to argue about FHA guidelines with a lender or your mortgage professional, remember, they are just an insurance company!

What are FHA’s Property Requirements?

The purpose of this blog is assist potential buyers about what FHA requires as it pertains to the condition of a property being purchased when utilizing an FHA loan for financing.  The guidelines may vary slightly depending on the lender or your geographic location.  It should be noted that the lender has the ability to have additional requirements and many do.   As a result of the different lender requirements, currently there are multiple misconceptions about what FHA’s actual minimum property standards are.  Please keep in mind that FHA is not a lender, they are an insurance company that the lender utilizes to insure their loan.  Here is a breakdown of what FHA actually requires taken directly from HUD’s website and other publications:

Repairs Required

Section 1103 – “FHA has shifted from its historical emphasis on the repair of minor property deficiencies and now only requires repairs for those property conditions that rise above the level of cosmetic defects or normal wear and tear.”

As Is Appraisals

Section 1103 – “FHA now permits “as-is” appraisals [on property] when minor property deficiencies, which generally result from deferred maintenance and normal wear and tear, do not affect the safety of the occupants or the security and the soundness of the property. FHA no longer requires repairs for these types of minor cosmetic deficiencies.”

Examples of conditions not necessitating repair include but are not limited to:

- Missing Handrails
- Cracked or damaged exit doors that are otherwise operable
- Cracked window glass
- Defective paint surfaces in homes constructed post 1978
- Minor plumbing leaks (such as leaky faucets)
- Defective floor finish/covering
- Evidence of previous (non-active) Wood Destroying
Insect/Organism damage
- Rotten or worn-out countertops – Damaged plaster,
sheetrock or other wall and ceiling materials in homes
- Poor workmanship
- Trip hazards
- Crawl space with debris
- Lack of all-weather driveway surface

Examples of property conditions that the FHA will require repair include but are not limited to:

- Inadequate access/egress from bedrooms to exterior of
homes
- Leaking or worn out roofs
- Evidence of structural problems
- Defective paint surfaces in homes constructed pre-1978
- Defective exterior paint surfaces in homes post
- 1978 where the finish is otherwise unprotected

“If the appraisal reports a potential property deficiency that may pose a threat to the safety of the occupants or the security and soundness of the property the lender will require an inspection of the condition to determine whether repairs are necessary to resolve the problem.”

Examples of conditions that will continue to require inspections include but are not limited to:

- Standing water against the foundation and/or excessively
damp basements
- Hazardous materials on the site or within the improvements
- Faulty or defective mechanical systems (electrical, plumbing
or heating)
- Evidence of possible structural failure (e.g. settlement or
bulging foundation wall)

Appliances

FHA states that the property must have a “Space” for cooking.  There is no specific requirement as to how the food is to be cooked or stored.  So they do not have any special requirement for the type or presence of appliances.  However FHA does defer to local law to ensure that appliances meet local code regarding proper amperage.

FHA requires that if the property does have appliances they must be in working order.  If your clients are purchasing a home that contains appliances that do not work and the seller is not willing to fix, it would be best to ensure the removal of the non-working appliances prior to the appraisal.  This would be in compliance with FHA guidelines.

Air Condition and Other Utilities

FHA defines the Heating/Air Conditioning unit as a utility and NOT an appliance so different rules apply.  FHA only requires that the heating unit works and is able to heat the house.  They do not require that the A/C unit work.  Most appraisers will test the unit and make comments in the appraisal report.

Pools

FHA requires a home with a pool to have a working pool pump that is able to circulate the pool water.  They also require that the pool has enough water in it so that the pump can effectively circulate the pool water.

FHA does not specifically test the water nor does it have a certain requirement as to the clarity to the water.  They do however open up a gray area by stating that the level and quality of the water in the pool must not pose a health or safety risk.  I.E. no mosquito infestations or algae!!

Home Inspection Requirements

Section 1103 – “FHA no longer mandates automatic inspections for the following items and/or conditions in existing properties:”

- Wood Destroying Insects/Organisms – TERMITES
- Well (individual water system)
- Septic
- Flat and/or unobservable roof

Most properties listed will state what type of financing is available for the property.  Please make sure that they list FHA as an option.  For additional information on FHA loans, please visit http://mortgageloansaz.com or http://hud.gov.

What is a 4506T?  How Can It Ruin My Mortgage Transaction?

Recently, I was anxiously awaiting the final approval from underwriting on a purchase money loan when I received the phone call that no one in the real estate/mortgage industry wants to receive, “your file has been denied”.  Of course, I asked “why”.  The underwriter then proceeded to inform me that they received the results from the 4506T and my borrower had not filed taxes in 2007 or 2008, so they were unable to validate my income and approve the loan.  Without being able to validate the income documentation that we submit through the IRS, lenders are left no other option.

What is a 4506T?  I have been getting this document signed for years and have never given any serious thought to what is was being used for and how it could negatively impact my loans.  IRS From 4506T is a Request for Transcript of Tax Return. This form is used to assist the lender in evaluating a borrower’s creditworthiness to obtain any type of loan, but it is used mainly for mortgage loans. It is an IRS transcript summary of an individual’s tax information used to validate the income furnished to the lender. Lenders use this form to validate the information provided to them by loan officers and borrowers.  It is especially helpful with detecting fraud. If you included 1040’s & W-2’s or 1099’s in the file, the 4506T is used to request a print-out which summarizes your tax returns for the years requested. This summary transcript validates the paperwork submitted to the lender. If this transcript does not match what was supplied to the lender or is not available, your loan will be denied unless you can furnish them with a reasonable explanation for the difference and further action may be taken against those individuals that furnished the documentation to the lender.

I strongly recommend that you start requesting 2 years tax returns on every file and emphasize to your borrowers that the lender will be verifying their tax returns as part of the loan process.  This will help you avoid the situation that I recently dealt with.  The rules have changed and we all need to make sure that we are aware of them and play by them.  It is minor improvements in the validation process by lenders that will hopefully improve the overall quality of the loans approved and continue to expose those individuals in our industry that lack ethics and integrity.