Occupancy Fraud In Mortgages And How To Avoid It


Occupancy Fraud In Mortgages And How To Avoid It

This BLOG On What Is Occupancy Fraud In Mortgages And How To Avoid It Was UPDATED On April 15th, 2019

By Gustan Cho

When mortgage borrowers apply for home loans, one of the questions that is asked is whether the property the home buyer is purchasing will be owner occupant, second home, or investment home. Whether the subject home will be a principal residence owner occupant home, a second home, or an investment property, borrowers need to disclose it on their intent on how they will be occupying the property.

  • The reason this question is asked is that there are different guidelines on owner occupant homes, second homes, and investment homes
  • First of all, FHA, VA, and USDA are only for owner occupant homes
  • Second and investment homes do not qualify for government-insured loans
  • Owner occupant homes have the lowest down payment requirement
  • Owner occupant homes also have the lowest interest rates
  • Second homes require a minimum of a 10% down payment
  • Investment homes require 20% down payment
  • Second homes and investment mortgage loans are all conventional loan programs
  • Conventional Loans normally have tougher credit standards than government loans
  • If a home buyer intentionally lies on their mortgage application where they state the subject property will be an owner occupant home but has no intention of having the new home purchase as their primary residence, the home buyer is committing occupancy fraud
  • Occupancy Fraud is a form of mortgage fraud
  • The home buyer may have the best intentions in purchasing the property for a family member who does not qualify for a mortgage due to credit or income issues
  • They may think that a little white lie will not hurt
  • But mortgage regulators and the FBI consider and view occupancy fraud as a serious crime

Lying About Primary Residence On Investment Properties

Besides buying a home for a relative who does not qualify for a mortgage due to credit issues, some home buyers purchase a home with the intention of renting it out.

  • They are often tempted to lie on their mortgage application
  • Home buyers often state the subject property is an owner occupant home to take advantage of the lower down payment requirements as well as the lower interest rates
  • This practice is a definite not allowed in the mortgage business
  • The consequences of getting caught are definitely not the risk of the potential rewards
  • If a realtor, attorney, mortgage loan originator, or seller advises buyers to do so and the home buyers involved are committing occupancy fraud
  • All participants will all get in trouble

Intent Of Deceiving Lenders

There are times where buyers have the intention of purchasing a home as an owner occupant home. After living there a few months, they decide to move out and live somewhere else and rent the owner occupant home.

  • This is acceptable
  • However, they need to prove that when they applied for the owner-occupied mortgage loan,  they had the intention of living in a new home purchase for at least a year or more
  • Circumstances like these happen all the time
  • Mortgage lenders cannot force homeowners to live in a property they just purchased with all good intention in living there
  • But due to circumstances, homeowners can decide to move out and rent the property
  • This is totally legal as long as homeowners have a legitimate reason
  • Some of the reason may be that they found a girlfriend or boyfriend and decided to move in with them and rent home
  • Another reason can be that they got a job transfer that is beyond commuting distance
  • Due to a job transfer, a homeowner had to rent another home closer to a new job and due to this fact that they rent the home out

How Long Do Homeowners Have To Reside In Owner Occupant Home

Mortgage lenders do not expect homeowners to live in owner occupant home forever.

  • A person can purchase a home as an owner occupant property
  • They can then decide to rent it out at a later time
  • However, they do not allow a home buyer purchasing a new home with the intent of the property not being an owner occupant home
  • Mortgage lenders define owner occupancy as a home buyer living in their home for a period of at least one year
  • If buyers purchase a property with the intent of living there for at least one year but due to change of circumstances need to move out and rent it out, I would contact the mortgage company and explain the circumstances for the record
  • Most lenders do not have a problem as long as there is a valid reason for the homeowner to move out and rent the property

Why Do Home Buyers Commit Occupancy Fraud And What Are The Consequences

There are various reasons why mortgage loan applicants commit occupancy fraud.

  • As mentioned earlier, one of the most common reasons for occupancy fraud is when a family member tries to help another family member and/or friend to obtain a mortgage because they cannot qualify on their own due to credit, income, or other issues
  • Chances are that they will not get caught
  • However, if the property does go into foreclosure within the 12 months of closing on the mortgage loan, the lender will scrutinize the file and see what went wrong
  • Chances are that they will get caught for occupancy fraud
  • Just because you get caught for occupancy fraud does not mean that there will be a full-blown FBI investigation or the person will get a 30-year federal prison sentence
  • However, the matter will be investigated and the mortgage loan can get called
  • Mortgage regulators will also investigate and depending on the case, the FBI may also investigate

Lying To Get Low Down Payment And Lower Mortgage Rates

Another reason why borrowers commit occupancy fraud is that the lower down payment requirements and lower interest rates that are offered to owner-occupied mortgage loans.  Mortgage lenders view owner occupant mortgage loans as less risky than second homes and investment home mortgage loan. That is why they require much lower down payments and have much favorable interest rates.  A homeowner can save more than $200 per month due to the more favorable mortgage rates on an owner occupant home mortgage loan than a second home or investment home mortgage loan.  Again, the $200 or so savings per month is not worth the consequences of getting caught for occupancy fraud and potentially getting prosecuted and convicted on a felony charge and having that on record.

Related> Mortgage fraud

Related> The Occupancy Clause in a Mortgage

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