Why Lying on Your Mortgage Application Just Isn’t Worth the Risk

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Updated on Friday, October 2, 2015


Have you ever gotten lost in daydreams about building wealth? We all have. And at some point, you’ve probably thought about purchasing an investment property to help you reach that goal. Maybe you’ve considered working for yourself as a full-time landlord. Or even building your own mini real estate empire and managing multiple properties.

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But before you start cashing an imaginary handful of rent checks, you should take a step back. Can you actually afford an investment property? Maybe a seemingly harmless white lie could enable your start towards becoming a mogul. Before you wander too far down that path, beware the consequences. 

My Investment Property Opportunity

Recently, my sister and I were offered the chance to purchase a two-family home right outside of Boston to settle a family member’s estate. It’s nestled in a quiet, tree-lined inner city neighborhood with tons of street parking. Plus, it’s just a few blocks from the subway, making it a prime location for someone commuting to Boston for work every day. Clearly, the house has major cash flow potential as a rental property.

So, what stopped us? The massive down payment. Because we both live out of state, the home would be considered an investment property. And financing an investment property with a conventional loan usually requires a minimum 20% down payment.

Appraised at nearly $600,000, we’d have to cough up a staggering $120,000 to cover the loan’s mandatory 20% down payment. Our dreams of becoming landlords were quickly deflated. We’d lost nearly all hope for the idea when she identified a potential loophole.

Many FHA loans can be approved with a 3.5% down payment, but require the property to be owner-occupied. FHA requires the borrower to establish the home as his or her primary residence within 60 days of signing the loan. Also, the owner must live there for at least a year.

“I can just say I live there,” she insisted. “Who would ever know the difference?”

How much could her seemingly innocent mortgage application fib hurt? Quite a bit, it turns out. Realizing we really couldn’t afford the home, we quickly abandoned our unattainable investment property idea. But, unfortunately, this doesn’t happen as often as it should.

Not all borrowers have been honest. Our country saw an uptick in rental property investments following the housing market collapse. And many borrowers intentionally misrepresented their living situation in order to secure a smaller down payment and lower interest rates for their loan. But misleading your lender about owner occupancy is an incredibly risky move. Lying on a mortgage application is considered mortgage fraud and is illegal.

Why Do People Lie About Owner Occupancy?

After being tempted by an attractive property we couldn’t afford, it’s really easy to understand how others are motivated to lie about their owner occupancy status. Especially when financing a first home with an FHA loan has significantly lower financial hurdles.

How much money do most people put down on a first home purchase? Despite the threat of costly mortgage insurance, many first-time homebuyers can’t scrape together 20%. Or they prefer to keep their cushion of emergency savings in tact, even if it means paying extra for a mortgage insurance premium (MIP).

Luckily, most FHA loans only require a minimum down payment of 3.5%. And because borrowers are required to pay MIP on these loans, FHA backed lenders can afford to offer more attractive interest rates.

Using Nashville’s current median home price of $230,000 as an example, it’s easy to see a stark contrast between the costs of FHA and conventional loans.

First, there’s a much smaller down payment. An FHA loan would require $8,050 to meet their 3.5% down payment. However, a conventional loan with a 20% minimum down payment would cost a borrower $46,000. Obviously, the $37,950 difference is huge and could potentially make a property unaffordable for some buyers.

Why is there such a huge difference? Loans for non-owner occupied properties are considered riskier and have higher rates of default. To protect their investment, conventional loan lenders also tend to charge higher interest rates.

The Consumer Financial Protection Bureau (CFPB)’s interest rates tool yielded significant differences in interest rates between FHA and conventional loans in Tennessee:

  • Credit score: 700 – 719
  • Home price: $230,000
  • Down payment: 20%
  • Rate type: Fixed
  • Term: 30 years
  • Loan type: Conventional

Interest rates: 4.0 – 4.5%

  • Credit score: 700 – 719
  • Home price: $230,000
  • Down payment: 4%
  • Rate type: Fixed
  • Term: 30 years
  • Loan type: FHA

Interest rates: 3.625 – 4.375%

Lenders Are Cracking Down

“Are you planning to make this home your primary residence?”

It may seem innocent enough to lie about where you’re planning to live. But Fannie Mae has named occupancy as one of their common mortgage fraud red flags. Their list of inconsistencies in an applicant’s loan file includes examples for lenders to look for like an unrealistic commute distance, new homeowner’s insurance that’s a rental policy, or a borrower who is downgrading from a larger, more expensive house.

Lenders have become more sophisticated in detecting mortgage fraud than ever before. Companies like LexusNexis have the software to analyze 16 dimensions of occupancy evidence, speeding up research time and reducing investigative expenses. This software makes it much easier to get caught.


What Happens If You’re Caught Lying?

Are you still willing to take the risk? You could be facing major trouble if you’re caught. For starters, your lender could immediately demand full repayment of the loan. And they could move the property to foreclosure if you’re unable to pay. But that’s not even the worst-case scenario. Your case could be escalated to the Federal Bureau of Investigation, risking criminal charges.

It’s Not Worth the Risk

A lot of people dream about building long-term wealth through real estate investing. But dishonesty isn’t the right way to get there. Mortgage fraud is illegal. And misleading your lender about your occupancy status can lead to foreclosure or criminal charges. Both of these can leave you worse off than before you decided to take a chance on that investment property. Bottom line: lying on your mortgage application about owner occupancy just isn’t worth it.