Owner Occupied Fraud

Understanding Owner Occupancy Fraud Mortgage Guidelines

Gustan Cho Associates are mortgage brokers licensed in 48 states

This guide covers owner occupancy fraud mortgage guidelines. There are three basic types of occupancy status when applying for residential home mortgages. Owner-occupied mortgage loans. Second homes or vacation home mortgage loans. Investment property mortgage loans.

Mortgage lenders often offer more favorable terms and interest rates for owner-occupied properties compared to investment properties. Borrowers may attempt to commit owner occupancy fraud to take advantage of these better terms.

In some cases, a difference in interest rates or eligibility criteria between owner-occupied and investment properties can motivate borrowers to resort to fraudulent practices related to owner occupancy. By doing so, borrowers seek to exploit the advantageous conditions offered to owner-occupied properties, potentially resulting in financial gain for themselves while posing risks to lenders.

What is a Type of Mortgage Fraud?

Mortgage fraud encompasses various illegal activities committed during the mortgage lending process. It involves misrepresentation, deception, or omission of information with the intent to obtain a mortgage loan under pretenses or to profit unlawfully. Examples of mortgage fraud include:

  • Providing false information on loan applications.
  • Inflating property values.
  • Engaging in straw buyer schemes.
  • Committing occupancy fraud by misrepresenting the intended use of the property.

Mortgage fraud can result in financial losses for lenders, investors, and borrowers, and it may lead to severe legal consequences, including fines, imprisonment, and damage to one’s credit history and reputation. Speak With Our Loan Officer About Owner Occupancy Fraud

What Constitutes Owner Occupancy Fraud

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Mortgage regulations vary depending on the country and region, but the significance of owner occupancy fraud and its potential repercussions remain consistent. Mortgage applications universally require borrowers to indicate whether they plan to use the property as their primary residence.

Misrepresentation on a mortgage application, particularly regarding occupancy status, constitutes fraud and carries legal ramifications. Lenders utilize diverse verification methods, including scrutiny of utility bills, driver’s licenses, and other residency-related documents, to confirm the borrower’s intent to occupy the property.

Penalties and Consequences of Owner Occupancy Fraud

If a borrower is discovered to have engaged in owner occupancy fraud, the lender might be entitled to demand full repayment of the loan. Legal repercussions could follow for the borrower, including fines and imprisonment. Furthermore, the lender retains the right to initiate foreclosure proceedings on the property.

Lenders generally establish precise criteria defining owner occupancy. For instance, certain lenders may stipulate that the borrower must inhabit the property for a specified minimum duration following the closing. Additionally, some lenders mandate that borrowers sign occupancy affidavits, thereby legally confirming their commitment to reside in the property.

Reporting Mortgage Fraud

Owner occupancy fraud is a significant concern for regulatory bodies, emphasizing the importance of detecting and reporting suspected instances within the mortgage industry. Borrowers must provide accurate information on their mortgage applications and adhere to loan terms to maintain integrity in the lending process.

Lenders implement robust procedures to identify and mitigate instances of owner occupancy fraud. Should individuals have queries or suspicions regarding this matter, seeking guidance from legal experts or mortgage advisors well-versed in local regulations is recommended.

How do you fight mortgage fraud?

Fighting mortgage fraud involves education, strict underwriting, technology, collaboration, regulatory oversight, training, and audits. These measures help prevent and detect fraudulent activities, ensuring the integrity of the mortgage industry and protecting stakeholders’ interests.

Differences of Owner Occupant Versus Non-Owner Occupant Home Mortgages

In this section, we will explain the reasons why lenders classify owner-occupant versus non-owner occupant mortgages: Owner-occupied resident mortgage loans offer the best terms and rates. Owner-occupant home financing requires the least amount of down payment.

FHA loans require 3.5% down payment, VA loans and USDA loans do not require any down payment on a home purchase. Mortgage rates on investment properties are normally much higher than owner-occupied or vacation homes/second homes mortgage loans.

Conventional loans require 3% to 5% down payment on owner occupant home loans. Second homes/vacation home mortgage loans require a minimum of 10% down payment.

Homebuyers cannot finance second homes and investment properties with governments loans. Government-backed loans are for owner-occupant primary homes only. There are three different types of government loans. Government loans FHA, VA, and USDA loans. Second homes and investment properties can only be financed with conventional mortgage loans or other alternative financing. Investment property mortgage loans require a minimum of 20% down payments.

Misrepresenting Occupancy Intentions

Borrowers who misrepresent themselves on their intended purpose on the use of the subject property they are seeking mortgage financing, they are committing fraud.

For example, homebuyers who intend on renting a home but claim that it will be owner-occupied on the mortgage application are committing owner-occupancy fraud, which is extremely serious and a felony. Mortgage companies and the mortgage lending industry sets general standards and lending guidelines. It has mandates on risk factors on the types of properties:

  • Owner-occupied mortgage loans
  • Second homes/vacation homes mortgage loans
  • Investment home loans

Investment properties tend to have a higher risk factor than owner-occupied homes. That is why larger down payments are required and mortgage rates are higher on investment property loans.

Owner Occupancy Fraud on Owner Occupied Mortgage Loans

Owner Occupied Fraud

Statistics prove that residential mortgage loans that are owner-occupied have the least factor and the least likelihood that it will go into default since it is the borrowers’ primary residence.

The analogy is when tough times hit the mortgage loan borrower on his principal place of residence, they are least likely to default.

Homeowners will do whatever means necessary to make timely mortgage payments on owner-occupied home loans. The person who owns a rental home is more likely to bail on their rental home than they would on their primary residence or second/vacation home. That is why mortgage rates on their primary owner-occupied homes and second/vacation homes are judged less risky. Mortgage rates are lower as well as less down payment is required than investment rental homes.

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Riskier Mortgage Loans Means Higher Mortgage Rates and Larger Down Payment

Due to the risk factor on investment homes, mortgage rates are normally higher and the mortgage lender will require a higher down payment for investment rental home mortgage loans. Minimum down payment requirements are 20%. Some mortgage lenders require 25% down payment or more on investment home mortgage loans.

Primary residence homes via FHA loans only require 3.5% down payment. 3% to 5% down payment for conventional mortgage loans. Second homes and vacation homes require 10% down payment.

Since the majority of home buyers want the lowest possible rates and the lowest down payment when purchasing a home, there are some home purchasers that will try to say that they are purchasing and applying for an owner-occupied primary residence when in fact they have no intention in living there. This is called owner-occupant fraud.

Owner Occupancy Fraud on Owner Occupied Principal Residence Mortgage Loans 

When a borrower signs the mortgage application, he or she will sign a sworn statement on the purpose of the mortgage loan, whether it is a primary residence, second/vacation home, or investment home loan. If the borrower never has the intention of occupying the subject property and is stating that the property will be a primary residence but his or her intention is to use it as a rental home or is buying it for a relative, then they might be committing owner occupancy fraud.

Although occupancy fraud may seem like it is a little thing, it is not. Owner Occupancy Fraud is a form of mortgage fraud and it is considered a federal crime.

If the borrower gets caught, they can be investigated and prosecuted. This will be the worst case scenario. The mortgage lender might call the loan and give the borrower time to pay off the loan in 90 days in other instances. It is really not worth jeopardizing lying about the occupancy status when applying for an investment property and stating it as an owner-occupied property when in fact it is not.

Owner Occupancy Requirements For Owner Occupant Homes

All owner occupied properties need to be occupied within 60 days of closing the mortgage loan. The borrower is required to live there for a period of at least a year as an owner occupant. However, the homeowner can move out if they have sudden extenuating circumstances as follows:

  • Job Transfer
  • Death in Family
  • Decide to sell home
  • Need larger space and need to upgrade
  • Need a smaller home and need to downsize

Buying Home Under Someone Else’s Name

Certain mortgage loan programs like FHA loans and Freddie Mac allows for non-occupant co-borrowers to be added on the primary borrowers’ name if the main borrower does not meet the debt to income ratio requirements. VA loans allow co-borrower spouses only to be added on the VA loan. Non-Occupant co-borrowers are not allowed on VA loans.

In many cases, home buyers ask if they can put the mortgage loan under someone else’s name. This can be done if someone else intends to occupy the property for at least six months and one day out of the year. If this is not the case, then they can add someone else as a non-occupant co-borrower to the FHA loans.

If the homeowner decides not to occupy the home they just closed, that is fine if this idea came after closing the home loan as long some extenuating circumstance happened. Examples of leaving an owner occupant primary home prior to the 12 month stay requirement include job transfer, divorce, or illness. This will not be a crime.

However, if the borrower always had the intention of not occupying the home purchase and renting it out or flipping it for a profit, then it can be classified as Owner Occupancy Fraud.

For more information on this topic or if you need to qualify for a mortgage with a direct lender with no overlays on government and/or conventional loans, please contact us at Gustan Cho  Associates at 1-800-900-8569 or text us for faster response. Or email us at alex@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays.

FAQ: Mortgage Guidelines for Owner Occupancy Fraud Property

1. What does this guide cover? This guide delves into the guidelines surrounding owner occupancy fraud in the mortgage industry. It outlines the three primary types of occupancy status when applying for residential home mortgages: owner-occupied mortgage loans, second homes or vacation home mortgage loans, and investment property mortgage loans.

2. Why do lenders offer better terms for owner-occupied properties? Mortgage lenders typically provide more favorable terms and interest rates for owner-occupied properties compared to investment properties. This is because owner-occupied properties generally pose lower risk factors for lenders.

3. What is owner occupancy fraud? Owner occupancy fraud occurs when borrowers misrepresent their intention to occupy a property as their primary residence in order to obtain more favorable loan terms meant for owner-occupied properties.

4. What are the consequences of mortgage fraud? Mortgage fraud, including owner occupancy fraud, can lead to significant financial losses for lenders, investors, and borrowers. It can result in legal consequences such as fines, imprisonment, and damage to one’s credit history and reputation.

5. How do lenders verify occupancy status? Lenders use various verification methods, including examining utility bills, driver’s licenses, and other residency-related documents, to confirm a borrower’s intent to occupy the property.

6. What are the penalties for owner occupancy fraud? If discovered, borrowers engaged in owner occupancy fraud may face demands for full repayment of the loan, legal repercussions, and potential foreclosure proceedings on the property.

7. How can mortgage fraud be reported? Regulatory bodies emphasize the importance of detecting and reporting suspected instances of mortgage fraud, including owner occupancy fraud, within the mortgage industry.

8. How can mortgage fraud be prevented? Preventing mortgage fraud involves education, strict underwriting, technological advancements, collaboration, regulatory oversight, training, and audits to detect and deter fraudulent activities.

9. What distinguishes owner-occupied from non-owner-occupied mortgages? Owner-occupied mortgage loans typically offer the best terms and rates and require the least amount of down payment compared to second homes or vacation home mortgage loans and investment property mortgage loans.

10. What are the occupancy requirements for owner-occupied homes? Owner-occupied properties must be occupied within 60 days of closing the mortgage loan, and the borrower is required to live there for at least a year. Certain extenuating circumstances may allow for earlier relocation without penalty.

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This blog about Understanding Owner Occupancy Fraud Mortgage Guidelines was updated on March 6, 2024.

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One Comment

  1. Im looking to buying a investment property as my first property, though I am afraid that if it doesn’t rent out in 4-6 months I won’t be able to pay it or be able to at least live in it

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