Committing Mortgage Fraud via Househacking Strategy

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Committing Mortgage Fraud via Househacking Strategy

Cameron C.
Philadelphia, PA · Member since 2013 · 43 posts · 12 votes

Hey BP,

I'll try to keep a long story short.  Currently about to purchase a 4BR 2.5 bath single family that I rent in Pittsburgh and turn my 3 roommates into tenants.  The advantage of this is that it will continue to be my primary residence, however, I will be able to have them pay the mortgage and I will be able to get conventional owner occupancy financing for the deal...or so you would think.

In a recent conversation with my mortgage broker, this came up.  Despite already being pre-approved and almost having a deal in place, we decided to throw out some "what ifs" around.  According to him, you cannot, under any circumstance, collect rent (income) from you primary residence.  I was sure to dig deeper and ask how this would apply to multi-families etc etc, however, he proceeded to tell me if the borrower knew this was his/her intent from the onset that this be disclosed and therefore down payments would need to be of at least 15% because this would be deemed as an "investment".  He went on to explain that this and another situation like say, buying the house today as owner occupied and turning it into a full rental in 3 months would constitute mortgage fraud because of the advantage one could get as it relates to the acquisition of the loan.

I have an extremely hard time believing this considering "house hacking" is such a common strategy across the board.  Could it be that this is lender specific?  For instance, this conversation took place with Quicken.  I'd like to stay away from the big lenders altogether but I've had a great interaction thus far and am being given super competitive rates compared to the smaller, local lenders.

That said, I'm looking for a little guidance and/or perspective as to whether or not this may be an issue for me down the road.  My full intent for this property is to buy it today, live in it and have my 3 roommates pay me rent and then in 2 years move out all together and it to continue as a rental for many years to come. 

Thanks,

Cam

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Dustin S.
Investor · Saint Paul, MN · Member since 2012 · 19 posts · 18 votes
9y

I believe that this mortgage broker is incorrect.

You need to move in within 60 days of closing and occupy the property as your primary residence for at least 1 year.

You are allowed to have roommates, family, tenants in your primary residence so long as you are still living there for 1 year. It's really none of their business what you do so long as you are fulfilling the obligations that you agree to when you close the loan (move in within 60 days, live there 1 year). I wouldn't even mention it.

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  • Dustin S.
    Investor · Saint Paul, MN · Member since 2012 · 19 posts · 18 votes
    9y

    I believe that this mortgage broker is incorrect.

    You need to move in within 60 days of closing and occupy the property as your primary residence for at least 1 year.

    You are allowed to have roommates, family, tenants in your primary residence so long as you are still living there for 1 year. It's really none of their business what you do so long as you are fulfilling the obligations that you agree to when you close the loan (move in within 60 days, live there 1 year). I wouldn't even mention it.

    10Reply
  • Nina B.
    Real Estate Investor · White Salmon, WA · Member since 2016 · 20 posts · 9 votes
    9y

    I absolutely agree with Dustin S.  I wouldn't even mention it...just get your loan as a primary residence.  To argue the point further regarding generating income from your primary residence...I give you one word "Airbnb."  Rest my case:)  Good luck!

    4Reply
  • Kevin Siedlecki
    Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes
    9y

    @Cameron C. - I agree with the two previous posts. The only thing I can possibly think is that if you had to rely on the income from the rental income to qualify for the loan, they wouldn't let that happen. But that's clearly not the case here, so it sounds to me like you have an incompetent mortgage broker. 

    5Reply
  • Account Closed
    Investor · Princeton, TX · Member since 2014 · 1k+ posts · 1k+ votes
    9y

    @Cameron C.   Most lenders know that the ability to rent out rooms lowers the likelihood of foreclosure.  On the other hand, pure rentals are more likely to get foreclosed on.  So as long as it is your primary residence for at least the first year most lenders will not care.

    0Reply
  • Cameron C.
    OP
    Philadelphia, PA · Member since 2013 · 43 posts · 12 votes
    9y
    Thank you Dustin S. Kevin Siedlecki Nina Buckley. I couldn't agree with all of you more. I was, and still very confused, why this would be any sort of issue. I was pre-approved for the loan amount long before we even had this conversation and it's a conventional style loan. The only think I would be somewhat curious about is whether or not I should then claim the income on my tax return? If I don't, I'm wondering if I would ever have any basis to enforce the lease if one of my roommates / tenants wanted to stiff me. I would argue those two tick and tie and you'd need to be consistent one way or the other.
    0Reply
  • Kevin Siedlecki
    Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes
    9y

    @Cameron C. - Yes, you should claim it. First of all, it's tax evasion if you don't. Taxes get complicate in house-hacking, because you can write off some of your expenses, but your CPA will be able to figure it out for you. 

    Your other worry is also legitimate. If you aren't claiming any income, then you can't argue that the lease has any validity. Even if you have an agreement signed with no money attached, if you're collecting money under the table, your tenants/roomates have all the leverage. They can just prove they've been paying you, and if you haven't been reporting it, and you are in trouble with the IRS. 

    I think most on BP will agree that real estate investing is not about skirting the law or evading taxes. It's about taking advantage of the systems in place to build wealth.

    6Reply
  • Cameron C.
    OP
    Philadelphia, PA · Member since 2013 · 43 posts · 12 votes
    9y
    Well that's exactly it, Kevin Siedlecki I have no intention of skirting the law / evading taxes, which is why I'm doing this extensive due diligence. These are all great answers and I fully want to ensure I understand all the potential scenarios. The other thing that came up today is in the event of a catastrophe, could an insurance company deny coverage because I breached a local occupant ordinance. I don't know that answer and currently have a question out to my insurance agent awaiting a response.
    1Reply
  • Stephanie MedellinBusiness Member
    Mortgage Broker · CA · Member since 2014 · 1k+ posts · 644 votes
    9y

    What you do with the additional rooms is irrelevant for purposes of this mortgage.  All that matters is that you are going to live there as your primary residence for at least a year, you and must qualify for the whole amount of the monthly payment based on your own income.  The lender does not need to know who else is living there or what arrangements you have with roommates.  I wouldn't even bring it up.  It is not mortgage fraud.

    [email protected]
    Stephanie Medellin, Loan Factory58 Reviews
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    4Reply
  • Daniel O.
    Investor · Takoma Park, MD · Member since 2016 · 166 posts · 147 votes
    9y

    You haven't mentioned your longer-term plan for this property beyond moving out in 2 years. One thing to keep in mind is that if / when you refinance the property, you will need to submit your tax returns as part of the documentation. At that point, it is clear that this is an income-generating property, so you would be looking at a somewhat higher interest rate to refi an investment property than a primary residence. Something to keep in mind, but probably not a deal breaker.

    3Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    9y

    Hi @Cameron C.,

    As others have said, your current mortgage lender is not correct.

    If you're living in a walk-in closet in the subject property as your primary residence within 60 days of closing, for at least 12 months thereafter, you are upholding the promise you're going to make before a notary public at the closing table. 

    Hell, if you read a standard Fannie/Freddie Deed of Trust (it's in that 150 pages you sign at the closing table... trust me, it's there), you will even note that it mentions rental income even for owner occupant mortgages. It mentions it specifically so it can say (basically) that "if you don't pay your mortgage, all the rent payments from your roommates belong to the lender and you aren't entitled to a dime," but rental income is specifically mentioned in the standard owner occupant Fannie/Freddie Deed of Trust (at least the one used here in CA).

    So it's a little ridiculous to say that it's fraud to have rent-paying roommates. If that wasn't allowed, why would specific non-prohibiting provisions related to rental income from roommates be mentioned in your closing paperwork?!

    10Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    @Cameron C., you wrote that your (incompetent) mortgage broker brought up "another situation like say, buying the house today as owner occupied and turning it into a full rental in 3 months would constitute mortgage fraud because of the advantage one could get as it relates to the acquisition of the loan" - as if that was RELEVANT?

    Sure, they're obliged to tell you that IF that was your intention or action, you'd be committing mortgage fraud. But surely, you couldn't be denied unless they KNEW you were lying?

    But how could they know that, if you're NOT lying about intending to live there for 2 years+?...

    1Reply
  • Account Closed
    Investor · Princeton, TX · Member since 2014 · 1k+ posts · 1k+ votes
    9y

    @Chris Mason   I think the "assignment of rents" language is standard nationwide.

    2Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    9y
    Originally posted by @Account Closed:

    @Chris Mason   I think the "assignment of rents" language is standard nationwide.

     There are some states that Fannie/Freddie has one-off Deeds of Trust and Notes for. I don't keep track of the language differences, but yes you are probably right that this specific provision is likely substantially identical nationwide. I've just never checked, so left the little disclaimer in. :)

    1Reply
  • Cameron C.
    OP
    Philadelphia, PA · Member since 2013 · 43 posts · 12 votes
    9y
    Thank you all for this insight. It certainly aligns to what I've thought all along and I plan to have another conversation with him today. I just want to ensure that nothing can come back to bite me when I show income on my tax returns and that leads back to me collecting income the first month after I close, therefore, maybe one could argue that was my intent all along. I don't think that's even a card you could play though. In no way am I trying to do anything shady. This WILL BE my primary residence. It will just ALSO double as an investment while I occupy it. Whether that would be my intent or not, I just don't understand the logic from the lender.
    1Reply
  • Cameron C.
    OP
    Philadelphia, PA · Member since 2013 · 43 posts · 12 votes
    9y

    @Stephanie Medellin and @Chris Mason I just thought of something this morning and would be curious to hear your perspective considering your expertise in lending...

    We talk about "intent" and "deceit" as it pertains to mortgage fraud.  I currently rent this property in question.  If, and when, I submit my purchase agreement (which will also be required as part of the mortgage application) I would obvious plan to include language and addendums to ensure that the current landlord transfer all escrowed security deposits and that pro-rated rents be routed to myself with the transfer of the property. 

    The question is, would I be incriminating myself as this is 100% my intent from the onset.  I have no interest in hiding that but I wonder if that will then affect me getting approved for financing?  I still have a hard time believing it should matter, and maybe need to look at another lender because of this, but per his definition, I think I would be in violation. 

    Your thoughts?

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    9y
    Originally posted by @Cameron C.:

    Well that's exactly it, Kevin Siedlecki I have no intention of skirting the law / evading taxes, which is why I'm doing this extensive due diligence. These are all great answers and I fully want to ensure I understand all the potential scenarios.
    The other thing that came up today is in the event of a catastrophe, could an insurance company deny coverage because I breached a local occupant ordinance. I don't know that answer and currently have a question out to my insurance agent awaiting a response.

    Insurance, taxes and occupancy issues are all good to consider in addition to your mortgage question. Be very open with your insurance company on what you are doing. Do not withhold information, because they can deny a claim if you are violating your insurance. Local occupancy laws should not be violated regardless of insurance. If there is a fire and someone dies, the fact that you broke occupancy laws will be a problem. Over occupancy is a common problem with rentals in college towns. Owners stack extra people in there to make more money and it creates a safety hazard and nuisance for the neighborhood. Every adult has a car, so the traffic increases over what was intended for a residential street. There is increased parking on the street and increased noise. The owner may not care because they often don't live there, but the laws are there to protect other residents of the neighborhood as well as the safety of the rental residents.

    As far as your mortgage question, I agree with what others have said. There are owner occupancy requirements for conventional mortgages, but you seem to be meeting those requirements. My guess is the lender is confusing those requirements and misinterpreting it to mean you cannot rent rooms.

    2Reply
  • Anthony Angotti
    Real Estate Agent · Pittsburgh, PA · Member since 2015 · 1k+ posts · 846 votes
    9y

    Hey @Cameron C.

    As everyone else has stated this isn't fraud at all. You just can't violate the terms of the mortgage. If it says you have to live there for one year you have to live there one year. 

    This is why I am waiting until next May to house hack my next deal. My current house hack financing says I have to live there for a whole year from the beginning of my occupancy. Once that year is up that financing stays in place but I'm moving to my next duplex. 

    I've even discussed this exact strategy with my lender and they are perfectly fine with it. 

    0Reply
  • Stephanie MedellinBusiness Member
    Mortgage Broker · CA · Member since 2014 · 1k+ posts · 644 votes
    9y

    @Cameron C.  That's kind of an interesting situation and one that I have not dealt with.  You have rooms rented at the time of sale of a single family home, where the tenants would be remaining, yet the buyer is going to live there too.

    When I answered before I was thinking in terms of moving roommates in after the fact.  I hadn't really considered what would be in the contract, but you're right, you want that language in there to protect yourself and ensure you're getting the deposits transferred.

    Having formal language in the contract about the security deposits and prorated rents is going to make it sound like a rental, so I would suggest writing a letter of explanation upfront with your loan application and submitting it that way.  This is a situation where I (as a broker) would consult with a few lenders upfront about the scenario to see who would be receptive to it. 

    [email protected]
    Stephanie Medellin, Loan Factory58 Reviews
    WebsiteView Page
    1Reply
  • Cameron C.
    OP
    Philadelphia, PA · Member since 2013 · 43 posts · 12 votes
    9y
    Stephanie Irto so just to be clear, you think that despite being a primary residence the fact that it is also a current rental might take precedence as it relates to financing?
    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y
    Originally posted by @Cameron C.:

    Stephanie Irto so just to be clear, you think that despite being a primary residence the fact that it is also a current rental might take precedence as it relates to financing?

    Maybe Stephanie missed the point that it's YOU who is already renting there (with or without others being beside the point)? My take on it is that those details are NOT at issue. Cheers...

    0Reply
  • Stephanie MedellinBusiness Member
    Mortgage Broker · CA · Member since 2014 · 1k+ posts · 644 votes
    9y

    @Cameron C.  No, I don't think it would take precedence, but I just think it might raise some red flags to underwriting.  Because I've never had this come up, I'd try to get an answer or opinion from underwriting before deciding which lender to submit to.   It is still your primary residence, you're just planning to have roommates live with you.

    I like to avoid potential problems, so I try to be more thorough upfront.  It generally works out better than going back to someone 2 weeks into the process and saying uhhh, we have a problem!

    [email protected]
    Stephanie Medellin, Loan Factory58 Reviews
    WebsiteView Page
    0Reply
  • Glenn D.
    Investor · East Grand Forks, MN · Member since 2015 · 105 posts · 64 votes
    9y

    @Cameron C.

    Here is the down and dirty!  You seem like, and I agree that you want to be above board and open.  As you said, you want to be informed and legitimate.  So "I believe" and "I think" are never good starters when talking legal ramifications.  NEVER go with I think or you should be able to... You can still go to jail for speeding on a road weather you knew what the speed limit was or not.  So as for is your Quicken loans broker correct, make him show you the clause in the documentation, read it thoroughly and ask a lawyer if necessary.  Most will give you a 1st appt for free.  As far as I know, most of the answers in this thread are correct BUT if it's in the mortgage documents that you "can not" sublet or rent out rooms, you will be the one breaking your agreement.  So make him show you a mortgage agreement and where it defines what he is talking about.

    As many have said, I think he is wrong but check the paperwork and that will be the defining document.

    Be smart - invest well 

    2Reply
  • Stephanie MedellinBusiness Member
    Mortgage Broker · CA · Member since 2014 · 1k+ posts · 644 votes
    9y
    Originally posted by @Brent Coombs:
    Originally posted by @Cameron C.:

    Stephanie Irto so just to be clear, you think that despite being a primary residence the fact that it is also a current rental might take precedence as it relates to financing?

    Maybe Stephanie missed the point that it's YOU who is already renting there (with or without others being beside the point)? My take on it is that those details are NOT at issue. Cheers...

     No I didn't miss that point.  I'm just trying to think about it from the perspective of the underwriter.  When they are looking at the application for an owner occupied loan and they review the sales contract and see prorated rents and security deposits, or that the tenants are staying in the home, it is going to be confusing.  Now many contracts have prorations as a standard clause.  You wouldn't have to write anything in.  Contracts differ from state to state. 

    One contract in upstate NY says "Seller shall assign to purchaser all written leases and security deposits affecting the premises."  It's already standard in the contract.  However when they review the estimated settlement statement / closing disclosure, those amounts are going to be listed as a credit to the buyer.  

    California has a section to state whether the buyer intends to occupy the property. If the property is tenant occupied it has a space to fill in when tenants will be vacating. You can also check that tenants will remain in possession. If they see both boxes checked (that buyer intends to occupy & tenants will remain in possession), it would be a good idea to explain the situation upfront, in a letter of explanation with the application.  It would be even better to run the scenario by them before submitting the application.

    [email protected]
    Stephanie Medellin, Loan Factory58 Reviews
    WebsiteView Page
    1Reply
  • Cameron C.
    OP
    Philadelphia, PA · Member since 2013 · 43 posts · 12 votes
    9y
    Thank you Stephanie Irto Glenn D. Brent Coombs I'm having a conversation with another broker this afternoon. I obviously wish this wasn't that difficult and convoluted but here we are! I want him to show me the clause in the mortgage agreement stating why I would be deemed as deceitful if I am TRULY using this as my primary residence. This will be the focus of my conversation with the alternative broker as well. In the meantime, I want to sift through the PA Sales Agreement to see if any of that language is built in as Stephanie Irto mentioned earlier, unless someone else already knows the answer. Thanks guys! This is all great insight! Cam
    0Reply
  • Glenn D.
    Investor · East Grand Forks, MN · Member since 2015 · 105 posts · 64 votes
    9y

    @Cameron C.

    I know that it sucks, but I am glad to see you doing your homework.  The benefits will far out way the hard work.

    1Reply
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