Purchasing an investment property with 5 % down?

8 Replies

Hi,

I'm very new to Real estate and I'm thinking about buying a condo here in Chicago. I'm quite aware most lenders won't finance an investment property unless I give a 20 % down payment. 

I want to give a 5-10 % down payment on the condo I want to buy. My real estate agent found me a lender who could "work things out". After speaking to the lender, he told me he just won't tell the underwriter the reason I'm buying the property unless they asked so technically the underwriter will assume this property will be owner's occupied. The lender has been in the market for 15+ years.

I wanted to know if this is common or if there are any legal consequences? Last thing I want is to sign a contract and then lose the earnest money. Any advice would be greatly appreciated. 

Dan

I'm assuming he's going for FHA financing, which they legally require you to be an owner occupant for a year (I think that's the minimum unless there is a compelling reason to move). But going into it with the plan of using it as an investment is illegal.

There is absolutely no problem with this UNLESS you have to sign a document that says you will be owner occupying the property. Then you are committing bank fraud. 

The odds that you get an owner occupied term and rate without having to sign such a document are pretty slim. Most likely you won't even know about it until it is one of a stack of papers you sign at settlement. 

Probably not a good idea.

@Daniel Moctezuma - I think losing your earnest money would be the least of your worries, especially if it is a FHA loan - this is what the penalties are

Mortgage fraud is a serious crime, and one punished by significant penalties. Because mortgage fraud can involve different crimes at either the state and federal level, the potential penalties associated with the crime differ widely. Mortgage fraud is typically charged as a felony offense, but misdemeanor crimes are possible in cases where only a small amount of money is involved, typically less than about $1,000.

  • Prison. Prison penalties for mortgage fraud can be significant. A conviction for federal mortgage fraud charges can result in a federal prison sentence of 30 years, while state convictions can last a few years or more. Misdemeanor fraud convictions can bring jail sentences of up to a year.
  • Fines.Fines for mortgage fraud are often extremely high, especially when professional fraud is involved. A conviction for a single count of a federal mortgage fraud can result in a fine of up to $1 million. State fines can range from a few thousand dollars for a misdemeanor convictions to $100,000 or more for felony convictions.
  • Restitution. Mortgage fraud convictions often include restitution payments as well. Restitution is different than a fine, though they both involve money. Restitution is designed to compensate the injured party for your wrongdoing, while the government imposes a fine as a penalty. If, for example, you are convicted of mortgage fraud after you make false statements when applying for a mortgage, you may have to pay restitution to the lender in addition to your fines.
  • Probation. Probation sentences can be imposed for a mortgage fraud conviction separately from, or in addition to, fines and prison sentences. Probation sentences for mortgage fraud typically last at least one year, but longer terms are common. Someone on probation must meet specified court requirements, such as making regular reports to a probation officer, submitting to random drug testing, and refraining from committing other criminal acts.

Welldone @Brie Schmidt . You have put in a great way that I don't have to say anything further. except if you don't occupy the property, it will be mortgage fraud. 

Good Luck.

I am currently living in a property which I rent from someone who bought it 6 months prior with an FHA loan. I talked to a lender before moving in to make sure it was legal. He said the documents require the purchaser to "INTEND" to occupy the premises. The lender said it was legal. Plans change situations change and that is not illegal.

@Matt Cramer Intent to occupy is for conventional loans. FHA loans make you sign an affidavit stating that you will move in within 60 days and that you will occupy for 1 year. This is a government backed loan and if you do not do so, it most defiantly is mortgage fraud. How do they find out? Random Lexus Nexis searches. That will provide them with what address your mail goes to, where your car is registered, who's name is on the utilities, ect

Thank you everyone for your help, especially to you @Brie Schmidt  for giving me such a detailed answer. I believe this would be a conventional loan and I was planning on moving to the property after the lease expires (April of next year). I decided to not purchase the property to avoid all the potential legal consequences. 

Thanks again everyone. 

Good to know! I wondered how that could be @Brie Schmidt  unless maybe it's a Michigan law. 

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.