What If You Lie About Owner-Occupied Mortgages?
You might feel a strong temptation to tell little white lies, or not-so-little white lies, on mortgage loan applications. After all, as long as you pay the mortgage and do not default, no one will get hurt. It is just so you can get a better deal. Take owner-occupied home loans, for example. They are often several percentage points lower than investment property loans and require a much smaller down payment. The benefit to lying leaves many to wonder what the risk is and if it is worth it.
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Significance
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Two factors determine interest rates and minimum required down payments for mortgage programs: market rates and the risk involved in giving the loan. Investment loans carry higher rates and down payment requirements because the history of default on these loans is much higher than that of homes used as owner-occupied primary residences. People will often do what is necessary to keep the home that shelters them, but will not fight to keep a rental home when things get tough. It is easy to walk away from a home you see as nothing but a losing investment or one that is no longer affordable, but it is difficult to walk away from a home that represents a substantial emotional and financial investment.
Effects
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Since the lender uses the information you provide on your loan application to assess the amount of risk posed by your loan, any misstatements you make affect that amount of risk. Lenders do not take kindly to putting money unnecessarily at risk and view these misstatements as loan fraud. Loan fraud is a federal crime. United States Code defines a person who "makes any materially false, fictitious, or fraudulent statement or representation" as guilty of loan fraud.
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Consideration
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You do not have to default on the loan in order to be guilty of loan fraud, though that raises a definite red flag. Lenders will often check on properties, especially in the first few weeks after a loan closes, to make sure that the borrower is truly occupying the home. Once suspicion is raised that the owner may not occupy a home, lenders get far more aggressive in their investigations.
Warning
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All borrowers sign an affidavit of occupancy as part of their loan closing documents that clearly states their intention to use the home as their primary residence. Many of these affidavits state that the claims in it are true. The loan application form you sign at application, and again at closing, states that everything contained in it is true. The loan application, and often the affidavits of occupancy as well, contain a clause above the signature notifying the signer that making any purposefully incorrect statements on these forms are punishable by law.
Penalties
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There is a range of penalties attached to loan fraud. The lender could choose to call the loan immediately and ask you to pay them the outstanding balance, which means you would have to refinance the loan, come up with the cash to cover it or voluntarily surrender the property. Title 18, Section 1001 and Section 1010 of the United States Code levies fines, up to five years of prison time or both on those convicted of the crime. Depending on the degree of the crime, there may be additional criminal charges attached.
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References
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