Occupancy fraud in mortgages is not always obvious
When a homeowner decides to buy another home, it is not uncommon for that homeowner to ask a lender to refinance his home in order to create cash for the down payment for the new home that he/she hopes to purchase. Next to lowering the interest rate and/or payments, creating cash with a refinance is the next most popular reason to refinance.
It is not an issue to create cash in order to buy another home unless the intention is to buy another home and move into the new home. The reason this is a problem is because mortgage guidelines are very clear: in order to refinance your current home with preferential “owneroccupied” rates and terms, you are agreeing that your intention is to live in your present home for at least the next 12 months. The wording in the deed of trust is very specific about this.
One of the most common types of fraud in the mortgage industry is occupancy fraud. The residential mortgage industry has three categories of occupancy: principal residence, rental property and second home. Mortgage lenders are on the lookout for fraud in every new mortgage that is originated.
Since the home that is being purchased or refinanced is the security for the new mortgage, the mortgage industry is very sensitive about the intended purpose of the home. Mortgages on homes that are occupied by owners present the lowest risk to lenders because a homeowner’s principal residence would be the property that a homeowner would be least likely to walk away from, given hard times. Mortgages on owner-occupied homes will qualify for the best rates and most lenient guidelines.
Rental homes probably account for the most popular form of fraud. The good news about rental properties is that 75% of the projected rents can be used to help qualify the borrower for the mortgage; on the other hand, a down payment of at least 20% will typically be required. During an economic downturn, borrowers who lose their jobs or whose properties have lost value, are more likely to stop making payments on a rental property they own before they stop making payments on the home they live in.
When a lender has to foreclose on a borrower, the lender will almost always lose money. Consequently, interest rates are higher, down payments must be larger and reserve requirements are higher for properties that will be held as rentals.
The third category of occupancy is the “second” home that will be used for vacations by the owner. Vacation homes are treated much the same way principal residences are in that mortgage rates are the same and down payment requirements are not as stiff as with rental properties. We sometimes get requests from prospective homebuyers who already own a home in, say Santa Cruz, and want to buy another one in Santa Cruz County as a vacation home. A vacation home loan in such a situation would usually be denied because it does not fit the model of a typical vacation home.
Lenders define vacation homes in slightly different ways but here are the basics: the home must be a single unit, it must be occupied for at least part of the year by the owner, it must be suitable for yearround occupancy, it must not be a rental property and it should be located away from the principal residence in a completely different area.
A borrower who applies for a loan as a vacation home when he intends on renting it is the same as a homeowner stating he will occupy the new home when in fact it will be a rental. And, believe it or not, fraud is also committed when a borrower says he will buy the home as a rental (in order to count rents to help qualify for the mortgage) and then moves in as his principal residence. These are all examples of mortgage fraud and if discovered by the lender, the borrower, at the very least, will have to pay off the loan immediately or lose the home to foreclosure or, in an extreme case, could face 30 years in prison and a fine of up to $1 million. Beware, lenders are known to send out representatives to knock on the door to ask questions if occupancy fraud is suspected.
Local mortgage consultant Peter Boutell has been writing this weekly column for the Sentinel since 1995. Send questions to Peter@ SantaCruzHomeFinance.com. Archived columns are available at www. PeterBoutell.com or at www.santacruzsentinel.com/topic/Peter Boutell.