Too Close to Home

Ardell’s recent blog, Agent FIRED! Lender Fraud, reminded me of one of my first transactions almost seven years ago. I can’t remember how I came across this client or how he was referred to me because I have deleted him from my database. I don’t ever want to provide a mortgage for him or anyone he’s associated with.

This person had contacted me wanting a mortgage for a home just a few doors down from his current residence. He had told me it was for his family members and that it should not receive a non-owner occupied rate. I informed him that currently, there are no special rates and programs for family members (it would be great if…but there’s not) and therefore, the loan is considered a non-owner occupied. He, of course, really wanted the lower rate that an owner occupied home would feature. A week or so later into the transaction, he asked me “What if I move out of my home and into the new home. My family can move into my home.

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About Rhonda Porter

Rhonda Porter is an NMLS Licensed Mortgage Originator MLO121324 for homes located in Washington state. Her blog, The Mortgage Porter, is nationally recognized for sharing relevant information to consumers about mortgages. She has been originating mortgages since 2000 at Mortgage Master Service Corporation #40445 Consumer NMLS Website: NMLS ID 40445. Equal Housing Opportunity. You can follow Rhonda on @mortgageporter, Facebook and/or Google+

33 thoughts on “Too Close to Home

  1. This post made me LOL.

    Lynlee (spouse) just had a client of ours call us (closed OVER a year ago) because they have never received any information regarding property taxes, among other things. Obviously you know where this is going…..

    After experiencing this question about a million times from others and after pulling their file, she mentions, “where are you residing? Is this a rental? ” Response: I live in x town and yes it’s a rental.

    No wonder mail isn’t getting to the right place. They bought it as “owner occupied,” so all mail is either being tossed by the tennant or is not forwarded. Happens all the time.

    Is this case we solved two things at once: 1) telling the owner they were responsible to pay their own taxes and it was not part of their loan payments–recipe for disaster for those who don’t budget. (yes, escrow does explain to borrowers what loan terms they have, but for some, it goes in one ear and out the other during signings) 2) confirming that the borrower purchased the home as a rental and probably never inteded to occupy it.

    This is not terribly shocking to anyone is it? (tongue-in-cheek)

  2. Rhonda,

    Thank you for this. If more people talk about these things, fewer people will do it. I do think we provide a valuable service to the industry by explaining that just because others do it, doesn’t make it right.

    Reminds me of what all the Mom’s say, what is it? Something about lemmings and if everyone jumps off a cliff would you follow them over?

  3. I’ve had multiple lenders tell me that one can buy a home with the intention of owner-occupied but change their minds after the fact.or, one needs only to ‘live’ in the home for one day or at the very least to move one’s belongings into the home. What are the owners obligation to the lending institution if they move in and then move out after a week, a month, a year, etc?

  4. Rhonda,

    Unless…they got an unexpected job transfer or Mother gets deathly ill and they have to leave town to care for her, etc…

    If they did in fact buy it to live in it and for some really legitimate reason they had to move out in a week and rented it as they intend to come back to Seattle…then the lender is SOL on that one.

    If they move in and find it is much smaller than they expected or another property comes on market they like better, etc…that’s OK too.

    As long as they can prove that the reason they moved out was compelling and occurred after it closed, then they are OK. No one expects people to have a crystal ball 🙂

    The hard part is when they have no legal outs, a big Earnest Money Deposit and find out during escrow that they have to leave town. Dilemma…possibly lose my Earnest Money…close and deal with it. At that point I would recommend they consult an attorney before they close escrow.

  5. Lying about owner occupancy is fraud. When customers play the..”what if” game, I ask them if they’d tell me they were moving into the home in front of their priest (rabbi, minister, etc).

    It’s a good litmus test for m.

  6. Brian,

    I do find people who ask that question simply because they are scared and not intending to move at all. The same way they ask about losing their earnest money.

    I can always tell by the way they ask the question, that they are coming from the right place when they ask “what if”.

    For instance, I have sold homes to people who know they are “settling for this for now” but are still planning to move to something more like what they really want, when it comes on market. Could be next week, next year…or never. But they do ask that “what if” question…in a “good” way. I’ve heard it many times from people who still live in their homes to this day.

  7. Ardell,
    You’re absolutely correct that “life happens” and as long as they can explain and prove it to the lender, all is well. And, as Brian mentions, when a buyer is asking how long do I have to live here to be considered owner occupied, a majority of the time, they are trying to play the “lets get NOO at OO rate game

    • OK I’m a bit confused. So is it OK to move into a house for a year and move out, to get the NOO rate? Is the initial guy in the wrong if he does move into that house? NOO rate without moving in is fraudulent, obviously…

      • Hi rogerdpack. It looks like a portion of this original post is missing. Sadly this has happened to a lot of the content at RCG. I believe the person in this post wanted to purchase the home next door for his family – that is considered an investment home (unless it qualifies for the Family Opportunity Mortgage).

        It is most likely acceptable to buy a home as owner occupied as long as you live in the home for 12 months. However, if you currently own your primary residence, and it is near the subject home (“near” typically means within 50 miles), then underwriters may consider the subject home as an investment property – even if you are living in it. The lender may also consider it an investment property if the subject home doesn’t make sense as a primary residence (ex. your current home is larger, nicer or closer to your employment than the home you are buying).

        Bottom line, moving into the home for 12 months won’t automatically get you a NOO rate…but it could.

  8. Brian, what if your client doesn’t believe in organized religion?

    The usual answer is, “I’d ask them if they’d tell me they were moving into the home in front of their mother.”

    What if their mother is a sociopath and has no problem with lying.

    The person is in front of you, the lender.

    I think the one un-answered question that remains, is how far ought a mortgage lender go to be assured the person in front of him or her is going to occupy the property.

    I mean, doesn’t a homebuyer sign something that says “I will occupy” right there at application time?

  9. Some borrowers ask pointed owner occupancy questions because they do NOT want to commit fraud.

    eg- Do I have to occupy in 60 days? I won’t be moving for closer to 90 days after I’ve done my remodeling.

    If you’ve written loans for more than 2-3 years, you can generally root out the liars. Rhonda brings up a good point. A good loan officer points out the wording of the OO affadavit and penalty for fraud.

    I couldn’t believe my “bagel guy” when he insisted that another originator suggested that he openly lie and leave it up to the underwriter. I do you compete with that?

    The answer don’t…you walk

  10. “Brian, what if your client doesn’t believe in organized religion?”
    “What if their mother is a sociopath and has no problem with lying.”

    Sheez, you ladies are tough tonight! Why the hell do I dig the smart ones?

    “I think the one un-answered question that remains, is how far ought a mortgage lender go to be assured the person in front of him or her is going to occupy the property.”

    I like Rhonda’s answer to that question, Jillayne

  11. Pingback: New Mortgage Program for Helping Out Family Members | Rain City Guide | A Seattle Real Estate Blog...

  12. I am currently purchasing house No. 2. I was upfront with the underwriter that we will be living in this home. The new home will be 4BR. HOwever, we also stated that we will be sharing the other two rooms with student whoever we choose.

    IN today’s economic uncertainty, people lose jobs, health expenses and house maintenance, we have to be prepared financially. This is the reason that we will be renting the other rooms because the house is located not far from the University and that a lot of students want to stay close to UNi.

    The Loan consultant was adamant that we should not declare that we planned to have the other two rooms for sharing and in return we pay rent.

    I insisted on being upfront and stated again that we will be staying in the new house but have the other two rooms to be shared with student.

    Is it true that more likely the underwriter will deny our loan application.

    FYI, house No. 1 will be rented out and we already have a signed lease agreement.

    I would appreciate if you could share me your opinion on this.


  13. Ingrid, how close is home number 2 to home number 1 (how many miles apart approx)? Are you wanting to use the room rentals of house number 2 to qualify for the purchase?

  14. Ingrid, first of all it’s very important to be honest and upfront with your lender…anything other than that is mortgage fraud.

    Even if you are not renting out rooms in the home you are buying, if it is located near your current home or if the underwriter does not believe that you will indeed occupy the home…it’s totally their call on if they want to treat the purchase as an owner occupied or an investment property.

    If they are treating the purchase as an investment property, then it will be tougher to qualify for the mortgage on the new home.

    If you are not able to convince the lender/underwriter that it is owner occupied, you may have to find a try a new lender. I recently had to do this with a transaction I had where a homebuyer was purchasing another condo in the same complex. The new condo was larger and she was going to rent out the old condo. The first lender I worked with didn’t “buy it”. I had to switch lenders/underwriters. The homebuyer had to qualify with both mortgage payments w/no credit for any rents and she did (barely). She probably would not qualify after this weekend when Fannie tightens their guidelines again.

    It is the underwriters call on if they want to believe a property is owner occupied. Renting out rooms shouldn’t really matter to the underwriter…however, if there’s enough with your transaction where it would cause the u/w to doubt that you’re occupy, it’s up to the underwriter.

    I’ve written more about whether a home is considered owner occupied, investment or vacation here.

  15. Hi Rhonda
    Thank you for your response above.

    Sorry I missed your questions. House No 2 is about 8 miles. The future rentals is not used to qualify for the mortgage. Our qualification or pre-approval were all based on our w2 income. Even our part-time income was not included.

    It seems that my declaration to have the two rooms to be rented out was accepted by the UW. But after that, we were asked to sign a gift letter by the loan officer. We disputed to sign a gift letter as the money in our bank account to fund the title company charges came from our home based business. It seems that our paper work was ok.

    Today we were asked to sign the contract in front of the Title company / notary.

    Does this mean we could finally move into house no. 2 soon?

    If so, how long do we have to wait from the date of signing to getting the house keys?

    I am all excited and really do not want to be disappointed.

  16. Ingrid, With the homes being 8 miles apart, I’m surprised the underwriter is not treating them as a rental. It sounds like they’ve accepted you’re residing in them and I’m glad you insisted on being honest and upfront with the lender.

    The gift funds is a new issue…it sounds like you may have large deposits that are not able to be sourced (provide documentation where the monies came from). Are you able to provide documentation for the money from your home based business?

    When you’re able to move into your home and get the keys depends on what your real estate contract says.

    Are you asking these questions to your loan originator and/or real estate agent? How are they advising you?

  17. Our house no 1 has a lease agreement and the tenant is expected to move soon but until the keys are not given to us we wont be able to move out.

    House no 2 is very good for us, because it is close to light rail (note the soaring gas prices n all). It is also a hotspot for students so why not rent out the other rooms. I dont mind sharing.

    I asked a lot of question to the realtor and title company but all have varying answers.

    I dont know how to treat large deposit. Combining all small checks received from home based business only totalled over 2K. To me that is not a large amount and to me it should not be treated as a gift. So I wonder why would a mortgage broker want us to declare it as a gift?

    Anyway, from what I gather reading all the blogs and contacting UW, house no 2 will be ours after the recorder transfer the title to our name.

    Many thanks for all the input.

  18. Hi Ingrid,
    Is the lender using your home based business income for qualifying for the new mortgage?

    Thanks for visiting RCG and asking your questions–it just may help other RCG readers. 🙂

  19. Hi Rhonda

    As per my statement on June 18, our qualifying income is based solely on our W2 (or full time job) declared income.

    Homebased business income are declared on 1099.

  20. Ingrid,
    Then what it looks like to me is that the loan originator does not want to disclose your home base business to the underwriter which is why they are disguising your deposits as a gift. Any large deposits must be sourced (supported with documentation) with a full doc loan. If your home based business has been in existance for 2 years and is profitable per your tax returns (or at least breaking even based on a 2 year average) then your LO should consider disclosing everything to the underwriter so it’s all on the up and up.

  21. Hi Rhonda

    I agree with your statement above. The LO probably did not want to disclose our home based business.

    The loan processor told my husband that the documentation that we sent “opened a can of worms”. Apart from that I noticed the loan processor dont even READ what is in the document. The LO was like doing a rush job, prefering to have a shortcut documentation which will fly in the eyes of the UW.

    Loan application should be based on quality. All I know is UW wants the truth. My letter to the LO stated that the business started only this year. Incomes are commissions only and its not on a regular basis. If she only read it, it should suffice.

    After all the headaches I got from the loan processor, it prompted me to contact an underwriter. I got a different opinion from the underwriter. My opinion and the underwriter’s opinion were almost the same.

    As a law student, I would ask the same question to myself, why would an income which is taxable, be declared as a gift ?… when it should be declared as a “second income”? To have it declared as a gift is plain FRAUD ?

    I did dispute the gift letter and I insisted that our application should be assessed based on our W2s. When the basis of approval is from W2s and income tax return, it should not question a documented cash flow from a second income.

    Here’s some info of the transaction from the start…..

    The first few weeks I had with this broker, I had a locked up interest rate of 5.5. Later it increased to 6.5 and they reasoned that the locked up rate was only good for one month.

    The next action the LO did was trying our prospective house no. 2 to be declared as an investment. And tried to convince me that its an HUD backup loan whatever. Honestly I laughed at myself. Did the LO really think that a customer is this stupid? This whole scenario took another 2 weeks of delay on the LO part.

    Next, we were asked to have a gift letter. As I mentioned I disputed it as I believe what my intuition tells me that the LO is inviting trouble.
    Another 1 week delay on the part of the LO.

    LO finally forward all the paperworks to the UW. UW approved all.

    Next action from the LO, informed us that the loan documentation was already forwarded to the title company (Wednesday).

    MOnday came we heard nothing from the title company. We contacted the title company, it turns out that LO forwarded it Friday evening.

    We were scheduled to sign all the papers. Id really thought we could get the house after both parties signed the agreement.

    Next action from the LO, she was silent and did not inform us that there is another issue that needed to be done. LO wanted a contractor to change the painting inside the house becuase it may be or was a lead based paint. Then LO will arrange an appraiser to come and check the house painting. Who will pay for this appraiser? Would the appraiser scheduled to check immediately or would it take another week to complete the paperwork.

    Now my questions are why did the LO lied to us that all is good? Why did the LO waited for another 2 weeks and then raise another issue after both parties signed the agreement.

    To me, this LO we are dealing with is a compulsive liar. We do understand that we want the house but we also do understand what’s HUD’s regulation. We nevertheless do understand that if we want to deal with this broker, they have to give us quality customer care.

    Then July 1, the tenant for our house no. 1 is expected to move as per the lease agreement. But with the remaining paint issue that needed to be resolved, it could take another week. Therefore, tenant for house no 1 wont be able to move as agreed. Tenant would definitely mad at us and possibly walk away from the lease agreement.

    Am trying to guess what is the next move of the LO. SAssuming LO would get back to us first week of July, LO would then ask us to forward an updated lease agreement on our house no. 1, as by this time she believe that there was an issue with the tenant. LO then would ask a check copy paid by the tenant to us.

    Counting all the delays made by the LO to close the escrow would be close 85 days. Our prospective house no. 2 is not a short sale nor a foreclosure. Would it really take 85 days to close the escrow?

    Therefore, there is something wrong with the LO. And I could only think of one thing, the interest rate has gone up recently. Its highest in 9 months. This delay tactic by the LO were all calculated so mortgage brooker could get more profit from us.

    My next guess is, this LO would raise our interest rate and then reason to us that the deadline for our 6.5 rate was over and the new rate should be used, possibly 7.5 or 8.

    OUr conclusion is we’d rather forgo the loan. We will ask them to refund all expenses paid for appraisal, home inspection and earnest money.

    Then we will take legal action.

    Hopefully Rhonda you will understand this whole saga. Now I understand why the mortgage industry is sinking and will be sinking for many years to come.

  22. Ingrid, I don’t even know where to start! It sounds like you have good reason to be suspect of this lender. I’m second guessing what’s happened with your transaction since I don’t have all of the details (your specific documentation, etc–you’ve been great at painting a picture).

    You are correct, the underwriter wants the truth. I am going to write a post (maybe a couple) about your scenario. It’s the loan officers job to take a complete loan application and then typically it’s submitted to “automated underwriting” which will produce findings. These findings will dictate what will be called for to support the loan approval. Some times, the findings won’t call for documentation to support income and other times, it will want 2 years complete tax returns. It all depends on what was entered into the computer as far as what the computer will spit out.

    With regards to your home based business…a few thoughts come to mind.

    1. It’s possible that your LO does not know how to read a tax return and probably thrived during the subprime markets with stated income. Now that these loans are gone (or very expensive), they don’t know how to exist with “a paper” underwriting.
    2. If your tax returns show a net loss over the past two years or even during the last year, it would need to be factored into your income. See comment 23.

    Declaring your revenue from your home based business as a gift and having someone sign a gift letter stating so is fraud. Is the LO creating (signing) the letter for you? The LO should have known by looking at your bank statements at application that you would need to address large deposits (if they were on your original statements).

    Regarding your rate. It sounds like your rate may not have been locked. If your rate was good for one month, they did not lock for a long enough period–your rate should not have gone up, there should have been an extension fee instead. With a copy of your purchase and sale agreement, the LO should have known how long your lock period would need to be and should have priced the loan accordingly. This is why consumers should not shop by rate. You may not get what you were promised by a bait and switch lender like Lending Tree–where the “quoted rate” is everything.

    If your LO did not lock you, they’re scrambling like crazy right now because as you mentioned (and can see by my Friday rate posts) rates have been going up. Did the LO provide you a written Lock Confirmation?

    85 day closing? 30 day is typical as long as the transaction is “normal”.

    Trust your instincts…you’ve pointed out a ton of issues with the LO. I’m sorry this has gone sideways on you.

    The mortgage industry will recover and desparately needed this correction. The Bad Apple-LO’s who got in for a quick buck and are still remaining won’t last long with the tightening guidelines…there’s simply too much too learn and stay on top of…it’s not easy money anymore. Consumers need to learn to select the person who is handling their mortgage needs by their qualities and experience–a fair rate will naturally follow.

    This is not the first Lending Tree night-mare I’ve heard of and I’m sure it won’t be the last.

  23. I’ve got an interesting scenario. I own two homes that are side by side on different tax lots. One has been a rental in the past and was originally financed as a non owner occupied home. My mother in law is on disability income due to cancer. We’ve moved her and my father in law into the home so that we can better assist her care and help them financially. They could not afford the home on their own. Can we refinance the home now as an owner occupied and take advantage of the rules related to elderly parent assistance programs? Thanks. Scott

  24. Scott, you may be able to do a “family opportunity mortgage” which would permit you to refinance with a owner occupied rate for your mother in law.

    Here is some basic information:

    Assisting an Elderly Parent
    Elderly parent must have insufficient income to qualify for a mortgage or be unable to work.
    The individuals qualify for the loan. The parents can be on the mortgage although it is not required.
    There are no distance requirements between the elderly parent and the individuals (their child).

  25. Hello Rhonda,

    I am buying a house in the U.S. while renting / working in the U.K. I am a first time buyer who intends to visit this property as often as possible (from the U.K. several weekends or more a year) and I have immediate family living nearby who will be visiting the property at least weekly (and staying there often). I do not own any property and as such am told that a primary residence mortgage is OK by my lender. Does this make sense to you? I am putting over 20% down, have a high credit score, high income, and no debts if that helps. Thank you in advance for your advice.

  26. Pingback: Is it a Primary Residence, a Second Home or Investment Property? | The Mortgage Porter

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