2022 saw a dramatic rise in interest rates, including rates on home mortgage loans. The rise was so swift that many potential home buyers were quickly priced out of the market. As the mortgage landscape has shifted from the historically low rates we all enjoyed these past few years, it is important to understand an important nuance of how home loans work prior to stepping back into the market.
When applying for a residential home mortgage, the borrower declares which type of occupancy they will utilize for the underlying property: 1) owner-occupied, 2) second/vacation home, or 3) investment property. The first two occupancy types typically have similar mortgage rates, while investment property rates tend to be higher. With the historic rise in mortgage interest rates we’ve experienced, there could be a temptation to declare one type of occupancy to secure a lower interest rate. However, there are federal mortgage guidelines for declaring occupancy that should be understood by all home loan borrowers prior to entering into a loan agreement.
If a borrower misleads the lender about their intended occupancy in order to obtain a more attractive interest rate, that can be construed as occupancy fraud. In some cases, borrowers may not even be aware that what they are doing is against the rules. And with mortgage rates rising quickly, some consumers may unintentionally try to bend the rules to save on mortgage costs.
To avoid committing occupancy fraud, the ultimate failsafe is to verify with your mortgage lender prior to changing the occupancy status of the property after it is purchased. There may be special circumstances, such as when someone is unexpectedly required to move for their job, work outside the country for part of the year, or care for an ill relative, where the lender may allow a modification of the loan terms. Intent matters in these situations. If you legitimately planned to purchase a home to live in, but then were forced to move due to circumstances beyond your control, there shouldn’t be anything to worry about. If you plan to purchase a second home with a lower interest rate, then decide to convert it to an investment property soon after purchasing it, that could be construed as intentional. Therefore, it may just be worth a conversation with your lender prior to taking action that may cross into the mortgage fraud realm.
In an ever changing interest rate environment, it is important to understand the rules surrounding mortgage rates prior to making a property purchase. At Sand Hill, we want to ensure our clients and partners are aware of the rules around occupancy fraud to avoid any unintended consequences. When in doubt, please reach out to your Wealth Manager to talk through the details of your particular situation.
Sources: Federal Bureau of Investigation, HSH, Forbes
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