SANTA CRUZ (October 3, 2009) - One of the biggest sources of fraud in the mortgage industry has historically been occupancy. That is, will the borrower really be occupying the property that is being used as collateral for the loan as his principal residence? Lenders offer better interest rates, more lenient qualifying and lower down payments for properties that will be occupied by the borrower vs. properties that are being purchased as rental property. For example, a borrower may buy a principal residence with just 3.5 percent down but an investment property will require as much as 35 percent down or if the loan amount is under $417,000, the down payment can be 20 percent.

Trouble arises when a borrower wants to buy a home and get the more favorable treatment that is provided for owner occupied homes but has no intention of moving in to the property. In the first place, the underwriter will study a borrower’s situation to determine if it makes sense for the borrower to be occupying the property as a principal residence. For example, if a borrower works in Los Angeles but wants to buy an owner occupied home in Santa Cruz, the underwriter will expect a written explanation as to how the borrower will deal with the 400 mile separation between home and office. In all fairness, many employees can either work from home or they travel throughout a territory and don’t need to report to their office regularly.

Underwriters also pay special attention when a borrower wants to buy a home as a principal residence that is priced considerably less than the borrower’s present home. A more typical scenario is for a homebuyer to move up into a more expensive home, not move down to a less expensive home. Because a borrower that already owns more than two homes is more likely to be buying another investment property, a compelling reason and a written explanation for wanting to buy another home that will become his principal residence will be required.

The mortgage industry also recognizes vacation homes or second homes and gives these purchases preferential interest rates also. Each borrower may own one vacation home as long as it is not located in close proximity to the principal residence. However, there are exceptions such as a homeowner living in San Jose and wanting to buy a vacation home in Santa Cruz County. This makes sense due to the vacation setting that we all enjoy here in this county. In one unusual case, we approved a second home purchase in Davenport for a borrower who had a principal residence in Capitola. Needless to say, a compelling explanation from the borrower was required.

One plus, when qualifying for a mortgage to buy a rental property, 75 percent of the rental income will count towards the borrowers cash flow on the property. This will obviously not be the case for a owner occupied or vacation homes unless the owner occupied home is a legal and conforming multi-residential property.

When it comes right down to it, the difference in rates and/or fees is relatively minor and it is a big mistake for a homebuyer to attempt to misrepresent his occupancy intentions for the property. The consequences of this action can be far reaching but will definitely include a request from the lender demanding a payoff of the loan within 30 days! It is not uncommon for the lender that discovers this kind of fraud to hold the broker or mortgage banker responsible.

This column is written every Saturday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.