What Is 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 for mortgages on owner-occupied homes than on investment properties where tenants will live. When occupancy fraud occurs, banks are not properly compensated for risk. 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 it is discovered.

Key Takeaways

  • Occupancy fraud is a type of mortgage fraud, whereby the borrower lies about whether or not the home will be owner-occupied.
  • Lies on mortgage applications are considered to be bank fraud. Such lies can trigger severe financial penalties, prosecution, and even prison time if convicted.
  • Renting out a property where the mortgage was obtained as an owner-occupied home is not always a crime.
  • Borrowers should always check with their mortgage lenders before renting owner-occupied properties to avoid accidentally committing occupancy fraud.

Understanding Occupancy Fraud

Lenders typically charge higher rates on mortgages for non-owner occupied homes, such as investment properties, 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 stigma 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 is an issue among smaller investors. People flipping fixer-upper properties is part of the problem. Home-sharing platforms, such as Airbnb, also made occupancy fraud easier. On the bright side, CoreLogic reported that occupancy fraud declined 2% between 2018 and 2019.

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

What happens to borrowers who lie about property use and are then discovered? Lenders can call the loan and demand immediate payment of the full mortgage balance. If the borrowers can’t afford it or refuse to pay, the lender typically moves to foreclose. That usually destroys whatever plans 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. They can trigger severe financial penalties, prosecution, and even prison time if convicted.

Committing occupancy fraud is a crime and can lead to a prison sentence in some cases.

Requirements for Occupancy Fraud

Renting out a property where the mortgage was obtained as an owner-occupied home is not always a crime. Occupancy fraud requires an intent to deceive. As a general rule, merely living at the property for one year or more is enough to prove an intent to occupy the home.

There are also several other situations where renting an owner-occupied property after less than one year is usually not considered occupancy fraud. The most obvious case is when an employment situation requires the homeowner to move somewhere else. Expatriates who are temporarily working in foreign countries are also often allowed to rent out their owner-occupied homes when they are gone. Getting married or moving in with a boyfriend or girlfriend is another possibility.

Borrowers should always check with their mortgage lenders before renting owner-occupied properties to tenants. That is the best way to avoid accidentally committing occupancy fraud.