Occupancy Fraud

Occupancy fraud is a type of mortgage fraud, whereby the borrower lies about whether or not the home will be owner occupied. Occupancy fraud happens when the borrower says that a home will be owner occupied, when in reality it will not be. Mortgage lenders typically offer lower interest rates to mortgages on owner-occupied homes, rather than investment properties where tenants will live. When occupancy fraud occurs, banks take on too much risk because they are receiving a lower interest rate than they should be for the delinquency risk that exists. Occupancy fraud is relatively common, however, it can carry severe legal and financial consequences if found out.

Lenders typically charge higher rates on mortgages for non-owner occupied homes, such as investment properties where the owner is landlord to a renting tenant, because of higher delinquency rates. Delinquency rates are often lower for the owner-occupied home because people do not want to lose their private residence and become homeless. There is a lot less attached to losing an investment property, where losses can be written off for tax purposes.

Mortgage lenders have noticed that this type of occupancy fraud has been increasing among smaller investors, perhaps as more people get involved with flipping fixer-upper properties or rent them short term via home sharing platforms such as AirBnB. According to Interthinx, a financial services analytics firm, in the last quarter of 2014, Miami had the highest rate of occupancy misrepresentation on mortgages, followed by Los Angeles. Two other California markets — San Diego and Fresno — ranked in the top 10 markets nationwide.

In reverse occupancy fraud, a borrower buys a home as an investment property and lists rent proceeds as income to qualify for the mortgage. But then instead of renting the home, the borrower occupies the home as a primary residence.

What happens to borrowers who lie about property use and subsequently are found out? Lenders can call the loan — demanding immediate, full payment of the outstanding mortgage balance. If the borrowers can’t afford to or refuse to pay, the lender typically moves to foreclose — damaging whatever plans of long-term investment or vacation rental home ownership the borrowers might have had. In cases involving multiple misrepresentations, lenders can also refer the case to the FBI: Lies on mortgage applications are considered to be bank fraud and can trigger severe financial penalties, prosecution, and even prison time if convicted.