Occupancy fraud is the second most common form of loan fraud, as the first type revolves around income issues.

“Owner-occupied” (“own-occ”) is a big deal in the mortgage world for several reasons:

1. Interest rates are more than .75%—1.5%  lower than those of investment properties, as lending to an owner-occupant is less risky.

Primary owners take better care of the property and are much less likely to fall into foreclosure than investment owners.

2. Minimal down payment loan programs, such as VA and FHA, are only available for owner-occupied borrowers.

Buyers Committing Fraud – Here’s Their Tactics!

3. Down payment requirements for Fannie Mae and Freddie Mac are also much lower for owner-occupied properties.

Proof Of Occupancy Evidence of Other Properties/Ownership

Lenders always want evidence that a property will be owner-occupied. 

FBI: Housing Fraud – What We Investigate!

Here are the circumstances they scrutinize:

1. Other homes. Suppose borrowers own another owner-occupied home multi rental properties (or units). In that case, lenders are not likely to consider a pending loan app as “own-occ” unless their primary residence is currently on the market (and subsequently must COE first).

For a buyer who owns more luxurious or larger homes, lenders routinely decline loans to buyers who claim they want to move into a smaller or inferior home. Lenders may approve the loan but will require evidence of changing circumstances, most likely job relocation.

 2. Proximity to Employment “The 1 Hour Rule.”

This is the other major factor lenders analyze, but lenders can be much more flexible now that more employees can now work remotely. 

Pre-Covid, borrowers had to be within a “reasonable commute distance” of their employer (and they still do if their work requires “hands-on” of a significant degree, e.g., manufacturing). 

Typically, the 1-hour rule was 60 miles or less by car or 90 minutes by train/mass transit.

Post-COVID-19, at the very least, an employee will have to get a letter or a verification from their employer stating precisely how the company is structuring the employees’ responsibilities.

The letter should address 

1) Job title and description 

2) Continued terms and conditions of employment

3) Any specific reason(s) why the buyer is being granted a waiver from in-office responsibilities

4) How often is the buyer reasonably expected to be at the place of employment?

5) Does the employer have other employees working out of area/state with similar responsibilities? And how many employees prove that?

 Self-employed borrowers will receive additional lending scrutiny, as moving to a remote location will not adversely impact their business.

For example:

Consultant attorneys, architects, and designers may not need to be near employers.

In the case of a personal service or any position that requires a high degree of personal contact, it is not likely to be approved.

A service-related position such as a doctor, house painter, or real estate agent that requires a “presence to build and maintain” a clientele will most likely not qualify for a loan.

3) Occupancy Verification

Lenders are good at predicting when buyers are playing fast and loose with loan status and will require additional evidence of owner-occupancy during the underwriting process. This includes signed affidavits and proof that utilities are OR will be in the borrower’s name.

4) Post Closing Verification

In this age of electronic data, lenders can easily root out fraud, even after the loan has been funded and the fraudster thinks they have made a clean getaway—not by a long shot.

If a lender gets a whiff of occupancy fraud, they can (for up to 12 months) access a borrower’s future tax return filing to determine if the borrower is now claiming rental income from the subject property.

It happened to a colleague’s borrower in early 2010, which indicated the extent to which lenders were willing to go to uncover fraudsters.

Lenders also do occupancy checks after loans after COE by having someone knock on the door and inquire about who lives there.

1-Owner Occupied Loan Annually

When they sign loan documents, owner-occupant borrowers have to formally attest that they “intend” to move in and live in the property for a minimum of twelve months.

A borrower can have only one owner-occupied loan per 12 months unless they sell a primary residence to purchase another primary residence.

In other words, a borrower can not refi their current property as a primary residence AND then purchase their next home (within 12 months) with an owner-occupied loan UNLESS they sell that home simultaneously. 

After residing in a property for 12 months, a borrower has fulfilled their statutory responsibilities and may rent out the home at any time AND obtain another home with an owner-occupied loan.

Other situations that may entitle persons to leave the property early and still have fulfilled the terms of the loan:

1) Job relocation/Job loss

2) Death or disability of an immediate family member or co-signer of the loan

3) Divorce

“We did “: Intend” to live in the property”
we just didn’t intend to go to jail.”

Fraud Detection with FraudGuard

Misrepresenting facts to a lender on a loan app (pending divorce)  and (employment, income, gift funds for a primary residence is considered “fraud for housing,”

Upon discovering the fraud, the lender simply calls the loan, and the owner has to refi the loan OR complete the home sale in (usually) 90 days.

Lying on a loan app to buy an investment property while claiming owner-occupied status is considered “fraud for-profit.” It probably means a 1-3 year prison sentence for each count.

Protecting Against Buyer Fraud
MLOs are Agents’ “Canary in the Coal Mine”

Agents (unknowingly) involved in the transaction can be scrutinized or even pulled into an investigation as fraudsters always rat out anyone and everyone remotely connected when the steel doors slam shut.

MLOs are much more likely to be charged AND receive more jail time, as D.A.s want to make an example of MLOs as a deterrent to others.

Copywrite © August 2018 Daniel Dobbs MHM Mortgage /// All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For permission requests, write to the publisher, addressed “Attention: Daniel Dobbs, Author- VP-Broker Mutual Home Mortgage 265 S. Randolph #120 Brea, Ca. 92821 Cell: 949 250-3981 Dandobbs6@gmail.com NMLS #307631 BRE #00986886