What happens if you lie on a loan application?

Consequences of lying on a loan application

Lying on a loan application may seem like a good idea if you don’t think you’ll get approval for the amount you need based on your finances, but there are some serious consequences that make it a bad idea in all circumstances.

• Rejection: If a lender discovers you lied or misrepresented facts on your loan application, the application may be rejected before funding.
• Immediate repayment: If you’ve already received the funds, the lender may demand full repayment with interest, leaving you responsible for more than the financed amount.
• Payments you can’t afford: Even if your lender never discovers the fraud, lying often results in approval for a loan larger than you can handle. This can leave you stretched thin financially and increase your risk of default.
• Damage to your credit: If you fall behind or default on those inflated loan payments, your credit score will be affected, making it harder to qualify for future loans.
• Imprisonment: Loan fraud can lead to an average prison sentence of 14 months, with maximum penalties of up to 30 years.
• Fines: Loan fraud can result in fines of up to $1 million, which may also limit your ability to repay debts and hurt your credit.

Common lies on loan applications

Borrowers falsify many details on loan applications, from income and job history to available funds and even property values.

• Income: Misrepresenting income is a common way borrowers get approved for higher loan amounts or more favorable loan terms. This is more common for self-employed individuals since income is self-reported.
• Job history: Lenders base your ability to repay your loan partially on your job history, so lying about past employment can lead to loans that wouldn’t otherwise get approved.
• Available funds: Borrowers sometimes falsify bank statements, shuffle money between accounts to exaggerate funds or provide fake gift letters to cover up the true source of a down payment.
• Undisclosed second mortgages: Some borrowers take out a second mortgage without telling the lender, using the same property as collateral for multiple loans.
• Owner occupancy statements: Some borrowers claim they will live at the property to qualify for loans like VA or Federal Housing Administration (FHA), but then rent it out instead.
• Inflating appraisal values: Some borrowers work with appraisers who purposely overvalue a property to qualify for a larger loan.

Legal implications of mortgage fraud

Loan fraud, or mortgage fraud specifically, is when an individual misrepresents or lies about the information on a loan application to secure a bigger mortgage, a lower annual percentage rate or other more favorable terms.

Lying on a loan application is considered fraud, and you can run into legal penalties if you’re caught. According to the U.S. Sentencing Commission, the average jail time for mortgage fraud is 14 months.

If you’re caught prior to your loan funding, you may just get denied. But in extreme cases, you could see fines of up to $1 million, as well as imprisonment with sentences as long as 30 years.

How lenders verify loan application information

Lenders go through a verification process to confirm that everything you put on your loan application is true and accurate.

The process varies by lender and loan terms, but it often includes verifying income and funds with pay stubs or tax forms, contacting your employer to confirm active employment, and checking reported debts against your credit report. For home purchases, lenders may also require third-party or approved appraisers.

Verification methods vary widely by lender. Some companies check credit bureau reports, run automated tools like debt-to-income calculators or use Know Your Customer (KYC) identity verification systems to confirm borrower information.

Regardless of these checks and verifications, the burden still falls on you to confirm that everything in your loan application is true and accurate. Any discrepancies between what you provide and what your lender finds could lead to legal issues.

» MORE: Key things to know before applying for a loan

Why honesty is the best policy on loan applications

Lying on a loan application could mean securing a higher approval amount for your loan or a lower interest rate that ultimately saves you money, but it’s never worth it to falsify information you provide to your lender.

Not only can lying on a loan application land you in prison or leave you with serious fines, but there are consequences even if you never get caught.

For example, getting approved for a higher loan amount than you can reasonably afford can increase your risk of defaulting on the loan, which will negatively affect your credit score and could prevent you from taking out future loans. Loan amounts that are higher than you can handle can also lead to financial hardship.

Building a positive relationship with a lender by being honest on your application can also lead to interest rate reductions and more favorable terms for long-term customers over time.

Securing your loan through legitimate means is always the better choice. If you don’t qualify, ask your lender about alternatives like smaller loan amounts, different repayment terms or government-backed programs. You may need to take some time to improve your credit score. Paying off debts can raise your score and lower your debt-to-income (DTI) ratio.

» FIND OUT: Ways to buy a house even with bad credit