What Is Owner Occupancy Fraud In Home Mortgages

This BLOG On What Is Owner Occupancy Fraud In Home Mortgages Was UPDATED On December 16th, 2017

There are three basic types of occupancy status when applying for a residential home mortgages.

  1. Owner occupied mortgage loans
  2. second homes/vacation homes mortgage loans
  3. Investment property mortgage loans

There are strict federal mortgage guidelines when it comes to types of occupancy when applying for mortgages.

Differences Of Owner Occupant Versus Non-Owner Occupant Home Mortgages

Here are 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 require the least amount of down payment
  • FHA Loans require 3.5% down payment, VA Loans and USDA Loans do not require any down payment, and 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
  • Home Buyers cannot finance second homes and investment properties with governments loans 
  • Government Loans are the following:
    • FHA Loans
    • VA Loans
    • 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
  • Mortgage rates on investment properties are normally much higher than owner occupied or vacation homes/second homes mortgage loans

Misrepresenting Occupancy Intentions

Mortgage loan borrowers who misrepresent themselves on their intended purpose on the use of the subject property they are seeking mortgage financing, they are committing owner occupancy fraud.

  • For example, home buyers 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 so that is why larger down payments is required and mortgage rates are higher on investment property loans

Owner Occupied Mortgage Loans

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 mortgage loan 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 riskier and mortgage rates are lower as well as less down payment is required than investment rental homes

Riskier Mortgage Loans Means Higher Mortgage Rates And More 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 a owner occupied primary residence when in fact they have no intention in living there
  • This is called owner occupant fraud

Owner Occupied Principal Residence Mortgage Loans

When a mortgage loan 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 it 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 mortgage loan 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 to jeopardize 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 mortgage loan 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 smaller home and need to downsize

Buying Home Under Someone Else 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
  • There are many cases where home buyers ask if they can put the mortgage loan under someone else’s name
  • This can be done if that someone else is intending on occupying the property for at least six months and one day out of the year
  • If this is not the case, then they can add that someone else as a non-occupant co-borrower to the FHA Loans

If homeowner decides not to occupy the home they just closed, that is fine if this idea came after closing the home loan. This will not be a crime. However, if the mortgage borrower always had intention on 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 The Gustan Cho Team at USA Mortgage at 1-262-716-8151 or email us at gcho@usa-mortgage.com. We are available 7 days a week, evenings, weekends, and holidays.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

Comments are closed.