Conditions of Mortgage Loan Application

• Your lender approves your loan on the basis of representations you have made, among them your information that you have a certain annual income. Many lending institutions require that you submit income tax returns verifying that income. Often they further require that you give them the right to communicate with the Internal Revenue Service (IRS) regarding your return as a condition of obtaining the loan.
  
  

Effect of Amended Return Showing Less Income

• Until you have closed escrow you do not have a contractual agreement. If the bank discovers you have amended your return and that return shows you made less than you originally represented--in banking terms that your "capacity" has lessened, the bank has a generally acknowledged right to terminate your application.
  
  

File Amended Return After Close of Escrow

• Once you have closed escrow you have a contractual relationship with your bank. This includes after close of escrow you file an amended tax return showing significantly less income than the income shown on your loan application. Because you have already established a contractual relationship, the bank may not unilaterally terminate your mortgage agreement without showing cause. Simply showing that you now cannot afford the loan or that your amended income would not have qualified you to obtain the loan is not in itself sufficient cause.
  
  

How Bank May Still Terminate Loan

• The bank can still terminate your loan, but only if you agree, or they show sufficient cause in a court of law. Two likely causes would be fraud and willful misrepresentation. Let's assume that in the application process you give the bank your most recent tax return, and it shows a net income of $750,000. Immediately after obtaining the mortgage, you amend the return and show an amended income of $670,000. This 11 percent difference in income would not qualify as "fraud," and the bank would have a difficult time proving to a judge or jury that you willfully misrepresented your income. Your tax accountant, for instance, could plausibly discover additional expenses and amend the return.
  
  

Willful Misrepresentation

• But let's say you declared a net income of $750,000 on your loan application; immediately following the close of escrow you filed an amended return showing an income of 35,000--around 95 percent less than your original declaration. While in theory the bank could claim fraud, they would be more likely to sue you for willful misrepresentation, an easier claim to substantiate. In general few civil suits actually proceed to trial--about 5 percent. More likely your bank would induce you to settle out of court. If you refused and went to court, who might win and who might lose would depend upon a number of particular circumstances.