Occupancy Fraud | the ascent

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Deliberately lying to a mortgage lender is occupancy fraud. If you’re unfamiliar with the term, we’ll explain when, why, and how some homebuyers commit occupancy fraud. We will also inform you of the potential repercussions.

What is Housing Fraud?

When a person applies for a mortgage, they are asked a series of questions, including whether they will occupy the home, use it as a second home, or rent it out to someone else. The question is asked because the guidelines for mortgages differ depending on how the funds will be used. For example, if a person is applying for a loan for a second home or an investment property, they do not qualify for a government-backed loan such as the FHA, VA, or USDA. These loans are strictly for homeowners. Mortgage lenders need to know why they are lending people money in order to meet government guidelines.

Why would someone commit occupancy fraud?

There are many reasons why a person might be tempted to commit occupation fraud. They include:

  • As mentioned, anyone borrowing money to buy a second home or investment property cannot take out a government-backed mortgage. This leaves them with a conventional mortgage. Typically, conventional mortgages have stricter credit requirements than government-backed loans, which can cause some people with less than perfect credit to lie about why they want to buy a property.
  • The loan applicant takes out a mortgage in their own name, even if it is for someone else. Often it’s a family member or close friend who puts their name on the loan because the person moving into the house doesn’t have a high enough credit score to qualify for a mortgage.
  • A borrower wants to make the smallest down payment possible. While an owner-occupied home may require no down payment (or as little as 3.5%), second homes require a 10% down payment and to purchase an investment property a borrower must put down a minimum of 20 % deposit.
  • The borrower realizes that the lowest interest rates are reserved for homeowners. If it’s a second home or they’re buying an apartment building, they can lie to take advantage of the lower rate.

Why is it important?

Lending guidelines are in place for a reason. If the Great Recession taught us anything, it’s how easy it is for someone to get in over their head with a mortgage they can’t afford. Let’s say a young couple has bad credit and can’t qualify for a mortgage. A group of parents take out a mortgage in their name, knowing that the couple will be living in the house. For their part, the couple promises to make the monthly payments, but old habits return and they do not keep their promise.

Legally, parents are responsible for repaying the entire mortgage, regardless of who lives there. And because they knowingly lied to the mortgage lender, the parents can face legal problems.

Is housing fraud punishable?

It may seem like a small lie to the person committing the fraud, but if caught, the act can have serious consequences. The person who took out the mortgage, knowing they were cheating the mortgage company, could face charges and significant fines. If anyone else was involved in the scheme, including a real estate agent, lawyer, or mortgage originator, they are also liable for committing occupancy fraud.

Occupancy fraud may not seem serious, but it is a form of mortgage fraud. And in the United States, mortgage fraud is a Class C felony, punishable by up to 20 years in prison, followed by three years of supervised release and fines of up to $5 million. In addition, the property can be confiscated.

For example, a person intends to purchase a rental property but wants to take advantage of the low down payment available through an FHA loan. Normally, this person would take out a conventional loan and put 20% down to buy an investment property. They make the system work by lying on the mortgage application, claiming they plan to be the homeowner. The day they sign the closing papers, the tenants move into the house.

Penalties can be severe

Fast forward five or 10 years. The same person applies for another mortgage. During a routine credit check, the lender realizes that he already owns a home and that is not the address listed on the loan application. After a quick background search online, the lender finds that the loan applicant has never lived in the property purchased with an FHA loan. In short, they are caught in the act.

Since occupancy fraud is a federal crime, there is little chance that the person will be probated. Under United States Sentencing Commission guidelines, a person convicted of occupation fraud would be sentenced to jail. In 2018, the average federal sentence for occupation fraud ranged from 20 to 24 months behind bars.

Finally, the person would be required to repay any gains made while owning the home. For example, if they paid a mortgage of $2,000 a month but collected $2,500 in rent each month, they would have to pay back the additional $500 they received each month they owned the house. If the owner sold the asset, he would have to return all the money earned from the sale.

Exceptions to the rule

The law accepts that life happens and circumstances change. Let’s say the homeowner in this scenario took out an FHA loan with the intention of living in the house for many years. In other words, he goes into the purchase with owner occupancy in mind. Unfortunately, they fall seriously ill a month after closing and have to move in with a relative to take care of their recovery. Since this person’s mortgage payments are still due each month, they find tenants willing to live in the house and make the monthly payment. This does not constitute fraud. When the owner filled out the mortgage application, he fully intended to live in the house as his primary residence.

Illness is not the only exception to the rule. For example, if a landlord loses his job and has to move to another state for a new job, he can move tenants into the house. The same is true if they had to move into a relative’s house to care for them, or if they met a new romantic partner and impulsively decided to explore the world for a year or two.

In other words, intention matters. If someone intends to live in a house when they apply for a mortgage, they have never lied to the lender.

A common problem

Because intent matters, it can be extremely difficult to prove that an owner intended to commit fraud. According to legal site NOLO, it’s estimated that about 10% of all mortgage applications contain either an intentional omission or an error. It is impossible to know how many of these omissions and errors were intended to deceive the lender and how many were simple oversights.

Although a person’s chances of uncovering a case of occupancy fraud are relatively low, the potential penalties should be enough to convince homebuyers that the risks associated with lying on a mortgage application are too great. .

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