What Is Occupancy Fraud?
By Gustan Cho
When a mortgage loan applicant applies for a mortgage, one of the questions that is asked is whether the property the home buyer is purchasing will be whether the subject home will be a principal residence owner occupant home, a second home, or an investment property. The reason this question is asked is because there are different mortgage lending guidelines on owner occupant homes, second homes, and investment homes. First of all, FHA insured mortgage loans, VA loans, and USDA loans are only for owner occupant homes and second homes as well as investment homes do not qualify for FHA loan programs. Owner occupant homes have the lowest down payment requirement as well as the lowest interest rates. Second homes require a minimum of a 10% down payment and investment homes require 15% down payment. Second homes and investment homes mortgage loans are all conventional loan programs and tougher credit standards apply than FHA mortgage loan programs. 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 which is the same as 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 and think that a little white lie will not hurt, but mortgage regulators and the FBI considerand view occupancy fraud as a serious crime and consider it as a felony.
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 and are tempted to lie on their mortgage application and 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 no no in the mortgage business and the consequences of getting caught is definitely not the risk of the potential rewards. If a realtor, attorney, mortgage loan originator, or seller advises you to do so and you are not a sophisticated investor, you as well as the people that advise you in committing occupancy fraud will all get yourselves in trouble.
There are times where you have the intention of purchasing a home as an owner occupant home and after living there a few months, you decide to move out and live somewhere else and rent the owner occupant home. This is acceptable but you need to prove that when you applied for the owner occupied primary residence mortgage loan, you had the intention of living on your new home purchase for at least a year or more. Circumstances like these happen all the time and mortgage lenders cannot force you to live in a property you bought with all good intention in living there but due to circumstances you decided to move out and rent the property. This is totally legal as long as you have a legitimate reason. Some of the reason may be that you found a girlfriend or boyfriend and decided to move in with them and rent your home. Another reason can be that you got a job transfer that is beyond commuting distance and had to rent another home closer to your job and due to this fact that you rent your home out.
Mortgage lenders do not expect you to live in your owner occupant home forever. A person can purchase a home as an owner occupant property and 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 you do 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 your mortgage company and explain the circumstances for the record. Most mortgage lenders do not have a problem as long as there is a valid reason for the home owner 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 goes into foreclosure within the 12 months of closing on the mortgage loan, the mortgage lender will scrutinize the file and see what went wrong and the 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 mortgage loan applicants commit occupancy fraud is because the lower down payment requirements and lower interest rates that is offered to owner occupied mortgage loans. Mortgage lenders view owner occupant mortgage loans a less risky than second homes and investment home mortgage loans and that is why they require much lower down payments and 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 your record for the rest of your life.