Occupancy fraud is committed when a borrower misrepresents the facts related to how the home will be used when it is purchased. A borrower might state the home they are purchasing is going to be used as a primary residence, when in fact they plan to use it as an investment property.
A lender will provide specific guidelines based on occupancy and a borrower might find it more beneficial to misrepresent their use to receive the best possible rates and programs. For example, a owner-occupied home receives a lower rate, has lower down payment options and is eligible for more products than an investment property. Since investment properties typically have a higher delinquency risk, they receive higher rates and require more stringent terms.
Reverse occupancy is committed when the borrower claims they are purchasing an investment property or non-owner occupied home so they can use the rental income from the property to help them qualify for the loan. If they misrepresent the use of the property in this way and don’t intend to rent it, it’s considered fraud. In this scenario, they are willing to pay a higher price just to get approved for the loan.
Here are some red flags to consider for these types of fraud:
- Real estate listed on application, yet applicant is a renter.
- Applicant intends to lease current residence.
- Significant or unrealistic commute distance.
- Applicant is downgrading from a larger or more expensive house.
- Sales contract is subject to an existing lease.
- Occupancy affidavits reflect applicant does not intend to occupy.
- New homeowner’s insurance is a rental policy.
- The borrower is currently renting and has a low rent or is living rent free.
- The property being purchased isn’t located in a predominantly owner occupied neighborhood with no history of rental property.
Occupancy fraud is only one type of fraud seen consistently throughout the country. There was a 2.9% increase in occupancy fraud from 2015 to 2016, according to Corelogic’s 2016 Mortgage Fraud Trends report. The states with the largest occupancy fraud include Delaware, South Dakota, North Dakota, Iowa, and Arizona.
Being aware of the different types of fraud will help your credit union keep their guard up and prepared for any possible fraud.