Mortgage Fraud: What You Need to Know

When you buy a house and don’t tell your banker you plan to rent it out, you may be committing fraud without even knowing it. Find out how to avoid this mistake and its consequences.  

Big city neighborhoods with rundown old homes for sale have suddenly become Bohemian havens, with rising rents and hipster cachet. Longtime homeowners in some cases are cashing out and freshly minted real estate investors are buying in.

If you’re a would-be landlord, especially if you’ve bought a home before, it looks like an easy way to start earning extra income.

And it might be if you do it right, but PNC’s Sonya Andreassen-Henderson has some important advice for you: Tell your mortgage loan officer your plans for the property.

Know what Fraud is

Andreassen-Henderson is a mortgage fraud investigator. She often sees cases in which a buyer has indicated that he will live in the home, only to turn around and rent it out. That is occupancy misrepresentation, and it is fraud.

“Some buyers take out a conventional home loan without understanding that loan requires them to actually live in the home,” says Andreassen-Henderson. “But there are others who go into the purchase with the intention of deceiving the bank and ultimately the company or agency that buys the loan from the bank, which in many cases is the Federal Housing Authority.”

occupancy fraud risk increased 2.9 percent from Q2 2015 to Q2 2016
According to CoreLogic's 2016 Mortgage Fraud Report, occupancy fraud risk increased
2.9 percent from Q2 2015 to Q2 2016

The incentives to fib can seem attractive, especially if a buyer has little cash up front.

To start with, there is a big difference in the down payment required. Thanks to government programs, such as those from the FHA, owner occupants can sometimes get into a house with as little as 3 percent down. A bank may require 20 percent for an investment property.

There is also a significant difference in the interest rate between owner-occupied home purchase loans and investment property loans. Over the course of the loan, that alone can add up to tens of thousands of dollars and cut into the investor's profit from rent.

Not a Victimless Crime

Getting caught has serious consequences. Most mortgage contracts give the bank the right to call the loan immediately in the event of fraud, default or breach of loan terms, and occupancy misrepresentation can create all three. That means the owner either has to pay the bank back in short order, or see the home foreclosed upon.

To avoid foreclosure, most owners decide to renegotiate the terms of the loans, often requiring more collateral and higher interest payments and penalties.

“This is not a victimless crime,” said Andreassen-Henderson. “Aside from how this affects the people you rent to, you would be misusing government backed programs designed to encourage home ownership for first-time or lower-income buyers and putting those programs at risk. It is better to be honest and work with your loan officer based on your true intentions so that they can find the right loan for you.”

PNC Mortgage offers insights and guidance during the entire mortgage process »

Sonya Andreassen-Henderson class=
Sonya Andreassen-Henderson says buyers need to disclose their exact plans when applying for a mortgage

CoreLogic's 2016 Mortgage Fraud Report shows that Florida is overall the riskiest state for mortgage application fraud.