Occupancy Fraud: Definition, Rules, and Penalties

What Is Occupancy Fraud?

The term occupancy fraud refers to a form of mortgage fraud that occurs when the borrower lies about the occupancy status of the property, stating it will be owner-occupied. Relatively common, borrowers commit occupancy fraud to get better interest rates on their mortgages. That's because lenders offer lower rates for owner-occupied homes compared to investment properties. Borrowers who commit occupancy fraud may face serious legal and financial consequences.

Key Takeaways

  • Occupancy fraud is a form of mortgage fraud that occurs when the borrower lies, stating a property will be owner-occupied.
  • This type of fraud is relatively common and happens because lenders offer lower interest rates on owner-occupied properties.
  • Occupancy fraud is akin to banking fraud, where banks can request the loan be paid in full.
  • Those who commit occupancy fraud may also face fines, penalties, and even jail time.

Understanding Occupancy Fraud

Occupancy fraud happens when borrowers mislead lenders about the intended use of their properties. Because financing is cheaper on owner-occupied homes, a property owner may say they want to use the home as a principal residence when, in fact, they plan to rent it out. It can also happen in the reverse situation. In reverse occupancy fraud, a borrower buys a house as an investment property, then lists rent proceeds as income to qualify for the mortgage. But instead of renting the house, the borrower occupies the house as a primary residence.

When occupancy fraud occurs, banks are not properly compensated for risk. Lenders typically charge higher rates on mortgages for non-owner occupied homes because of the higher delinquency rates associated with them. Delinquency rates tend to be lower for owner-occupied properties because borrowers don't want to lose their own homes. The stigma attached to losing an investment property is often much lower, since losses can be written off for tax purposes.

This type of mortgage fraud is fairly common among smaller investors. For instance, people who flip houses and those who use home-sharing platforms, such as Airbnb, commit occupancy fraud much more regularly than larger-scale real estate investors who buy multiple properties in a year.

During the financial crisis of 2020, all types of mortgage fraud increased, with occupancy fraud risk rising 5.6% in 2021 over previous years.

So what happens to borrowers who lie about property use and are then discovered? Lies on mortgage applications are considered to be banking fraud. They can trigger severe financial penalties, prosecution, and even prison time if convicted. For one thing, 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 the borrowers' original plans. In cases involving multiple misrepresentations, lenders can also refer the case to the FBI.

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

Special Considerations

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

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 temporarily work in foreign countries are often allowed to rent out their homes during their absence. Getting married or moving in with a boyfriend or girlfriend is another possibility.

But what about a home that you purchase for your child—is that still considered an investment property? That actually depends. If your child is paying the mortgage but isn't named on the mortgage application, documents, and title, it's still considered an investment property, so you'll end up paying a higher interest rate.

If I Move Out of My Property, Did I Commit Occupancy Fraud?

That depends on your original intention when you got the mortgage and the reasons for moving out of the property. If you legitimately intended to use the property as a primary residence and then stopped using it shortly after closing (i.e., less than a year) due to circumstances beyond your control—like getting a promotion out of state—then you did not commit occupancy fraud.

What Are the Penalties for Committing Occupancy Fraud?

The penalties for committing occupancy fraud can vary. Your lender can recall the loan or foreclose on the property in question. You can be investigated by the FBI and if they discover you have committed occupancy fraud multiple times you can be fined several thousands of dollars. After committing occupancy fraud, getting mortgages on new properties, even ones you legitimately intend to use as a primary residence, may become impossible.

How Do I Report Suspected Occupancy Fraud?

If you know who the lender on the property is, you can contact them directly to report the suspected fraud. You can also contact your local FBI office to report suspected occupancy fraud.

The Bottom Line

Lenders charge lower rates to intended owner-occupants than to investors because investors are more likely to default. While saving money is tempting, do not commit occupancy fraud or you may end up losing your property to foreclosure or investigated, fined, or imprisoned by the FBI.

Article Sources
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  4. Federal Bureau of Investigation. "Mortgage Application Fraud." Accessed Feb. 5, 2022.

  5. Federal Bureau of Investigations. "Financial Institution/Mortgage Fraud." Accessed Feb. 6, 2022.

  6. HSH. "Why are mortgage rates higher for investment properties than for second homes?" Accessed Feb. 6, 2022.