Borrowers who aren't as forthcoming on their loan applications on certain items – such as occupancy status – may feel like it’s harmless, but lenders say such "white lies" constitute fraud.
Occupancy fraud is one of the most common lies from borrowers on mortgage applications. Lenders want to know if borrowers intend to actually live in the house they're purchasing or whether it's a primary, second, or investment property. If the home isn't a primary residence, the person's chance of default tends to be higher.
Borrowers who are dishonest are committing occupancy fraud.
"People will try to get an owner-occupied loan as opposed to an investment property loan because you can get a higher loan-to-value, meaning a lower down payment, on a primary," says John T. Walsh, the president of Total Mortgage Services in Milford, Conn. "And you're going to get a better interest rate on an owner-occupied."
For example, a down payment on a primary residence could be as low as 3 percent while a loan for a single-family investment property could be at least a 15 percent down payment, Walsh says. What's more, the interest rate could be as much as half a percentage higher, he notes. Occupancy fraud comprised 19 percent of all mortgage misrepresentation on loans backed by Fannie Mae in 2013, the latest data available.
"Occupancy fraud is costly to lenders because it can raise the default rate and the risk that, if a fraudulent loan is exposed, the loan investor (like Fannie Mae) could require the lender to buy back the loan," The New York Times reports.
Lenders are getting better at catching false occupancy claims, looking for such red flags as borrowers who have mortgage applications pending elsewhere or who have an unusually long commuting distance between their property and place of employment.
Many people think lying about occupancy is "the white lie of mortgage fraud," Tim Coyle, the senior director for financial services at LexisNexis Risk Solutions, which develops risk mitigation tools for banks. "But it's extremely costly to the banks and financial institutions."
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