A common type of fraud is occupancy fraud. The residential mortgage industry has three categories of occupancy: principal residence, rental property and second home. Mortgage lenders are on the lookout for fraud in every new mortgage that is originated. Since the home that is being purchased or refinanced is the security for the new mortgage, the mortgage industry is very sensitive about the intended purpose of the home.
Mortgages on homes that are occupied by owners present the lowest risk to lenders because a homeowner’s principal residence would be the property that a homeowner would be least likely to walk away from, given hard times. Mortgages on owner-occupied homes will qualify for the best rates.
Rental homes probably account for the most popular form of fraud. The good news about rental properties is that 75 percent of the projected rents can be used to help qualify the borrower for the mortgage; on the other hand, a down payment of at least 20 percent will typically be required. During an economic downturn, borrowers who lose their jobs or whose properties have lost value, are more likely to stop making payments on a rental property they own before they stop making payments on the home they live in.
When a lender has to foreclose on a borrower, the lender will almost always lose money. After all, lenders are only interested in one thing: receipt of a regular monthly mortgage payment every month until the mortgage is paid off. Since the mortgage business is a…