Underwriter denied me for potential owner occupancy fraud

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Underwriter denied me for potential owner occupancy fraud

Mattaniah Yip
Investor · Los Angeles & Detroit · Member since 2014 · 52 posts · 17 votes

Hey guys! My husband and I currently own an owner occupied duplex in Los Angeles. We found another duplex .6 miles away we planned move into and finance via FHA. We were in escrow for about 20 days and everything seemed to be going smoothly. Then I was given the run around for another week and was just denied because they didn't believe we were going to move into the new duplex. We explained to them that the new place is in a better area. If you know LA; .6 miles can make a difference in the quality of neighborhood. Has anyone experienced being denied because bank assumes you are committing fraud? Can anyone recommend a loan officer who can handle something like this?

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Stephanie Cederdahl
Flipper/Rehabber · Cincinnati, OH · Member since 2014 · 10 posts · 7 votes
8y
@Mattaniah Yip I'm a FHA and conventional underwriter. Your issue is going FHA. I recommend going conventional (you don't have to put down 20%). Your statement of intent to occupy as primary and a detailed explanation that you are moving for safety reasons should be sufficient to the underwriter.
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  • Stephanie MedellinBusiness Member
    Mortgage Broker · CA · Member since 2014 · 1k+ posts · 644 votes
    8y

    @Mattaniah Yip  Does the new duplex have more space or better features that could also help add to explain why you'd want to move?

    Having a tenant lined up with a signed lease and paid security deposit for the unit you're planning to vacate could also help make your case, even if not using the income to qualify.

    Were you trying to use rental income from your previous residence to qualify?

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  • Mattaniah Yip
    OP
    Investor · Los Angeles & Detroit · Member since 2014 · 52 posts · 17 votes
    8y

    Hi Stephanie!

    The space is actually one bedroom smaller.  However, it is still big enough for our family.  We are mainly moving because of safety concerns which was thoroughly explained and illustrated to them. We provided proof of our concerns.

    Yes, we were using our potential rent as income.

    They did not care about a potential tenant .  They claimed we could falsify a tenant!  I guess we had a very suspicious underwriter.

    0Reply
  • Aaron Hunt
    All Over, USA · Member since 2017 · 689 posts · 756 votes
    8y

    One bedroom smaller...red flag.

    Do you own your current place outright or financed?

    1Reply
  • Mattaniah Yip
    OP
    Investor · Los Angeles & Detroit · Member since 2014 · 52 posts · 17 votes
    8y

    It is financed with a lot of equity.

    0Reply
  • Tony HightowerPro Member
    Rental Property Investor · Clarksville, Tenn · Member since 2017 · 72 posts · 34 votes
    8y
    i do not believe "one bedroom smaller" should be a red flag. we are considering buying a duplex in a C class neighborhood and renting out our current home in an A class. the move to duplex will put us both within 6 miles of work and we currently live in a 4 bedroom but there is only 2 of us. suspicion should not be enough to stop a mortgage.
    3Reply
  • Mattaniah Yip
    OP
    Investor · Los Angeles & Detroit · Member since 2014 · 52 posts · 17 votes
    8y

    @Tony Hightower I 100% agree with you.  Sad thing, it happened one week before closing.  Trying to find alternatives.

    0Reply
  • Aaron Hunt
    All Over, USA · Member since 2017 · 689 posts · 756 votes
    8y
    Originally posted by @Mattaniah Yip:

    It is financed with a lot of equity.

    Originally posted by @Mattaniah Yip:

    It is financed with a lot of equity.

    First home, larger and financed as owner occupied.

    Second home, down the street, with one less bedroom and financed as FHA.

    I wouldn’t have even bothered in that scenario...slim chance of getting that through.

    With all that equity in Prop A, you’re better off pulling dead equity from Prop A, and buying Prop B with 20% down and sliding by conventional. Or probably could even do 5% conventional and still get by underwriting.

    3Reply
  • Aaron Hunt
    All Over, USA · Member since 2017 · 689 posts · 756 votes
    8y
    Originally posted by @Tony Hightower:
    i do not believe "one bedroom smaller" should be a red flag. we are considering buying a duplex in a C class neighborhood and renting out our current home in an A class. the move to duplex will put us both within 6 miles of work and we currently live in a 4 bedroom but there is only 2 of us. suspicion should not be enough to stop a mortgage.

    Unfortunately, what we believe don't matter. FHA is always a PITA anyways.

    1Reply
  • Account Closed
    Member since 2018 · 214 posts · 175 votes
    8y
    @Mattaniah Yip This is a common denied. I have heard many similar denied story like this. One of the story was, the buyer wanted to buy another house for owner-occupied with 20% down payment and asking for owner occupied lower interest rate. The buyer did actually move in to the new house. Unfortunately, the underwriter said, even though your new house is owner-occupied, because the new house is smaller than your old house, we have to offer you the higher Investor interest rate instead of the lower owner-occupied interest rate, and must be 25% down payment instead of 20% down. Finally, she purchased the new house with 25% down and higher interest rate. Otherwise, she could not get the house.
    2Reply
  • Christian BachelderBusiness Member
    Real Estate Broker · Marina del Rey, CA · Member since 2018 · 105 posts · 25 votes
    8y
    @Mattaniah Yip Hi Mattaniah, I’ve actually dealt with this exact problem before with one of my clients looking to do almost identical to what you are trying. I would recommend against FHA. The proximity of the second property and the fact that it’s essentially a “downgrade” (even if not so in your eyes) would trigger most underwriters to deny the loan app. You can do a 3-5% down owner occupIed conventional loan and probably have a better chance of getting it through underwriting. I know of a pretty good conventional lender who is allowing future rental income to go towards the qualifying ratios with very few questions asked outside of a signed lease. Feel free to reach out anytime! Not trying to steal anyone’s business, but a fresh set of eyes on a case never hurts. Happy to help, even if you go elsewhere to close it.
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  • Albert Ng
    Rental Property Investor · San Jose, CA · Member since 2015 · 401 posts · 221 votes
    8y
    @Mattaniah Yip Is your first duplex also financed with FHA? Maybe try a conventional mortgage with 20% down. You will have to get a line of credit from your current property, but save on the PMI. They do check, but I believe they are easier when it come to owner occupied 2nd house.
    0Reply
  • Stephanie Cederdahl
    Flipper/Rehabber · Cincinnati, OH · Member since 2014 · 10 posts · 7 votes
    8y
    @Mattaniah Yip I'm a FHA and conventional underwriter. Your issue is going FHA. I recommend going conventional (you don't have to put down 20%). Your statement of intent to occupy as primary and a detailed explanation that you are moving for safety reasons should be sufficient to the underwriter.
    4Reply
  • Stu Wann
    Laguna Niguel, CA · Member since 2018 · 14 posts · 14 votes
    8y
    @Mattaniah Yip Did you go through a direct lender? Try going non-FHA with a direct lender with in house underwriting, they ar typically more lenient. I have some great lenders in the LA area if you need a referral. Feel free to DM me.
    0Reply
  • Mattaniah Yip
    OP
    Investor · Los Angeles & Detroit · Member since 2014 · 52 posts · 17 votes
    8y

    Thanks everyone for all of your input.  I really appreciate everyone's thoughts and advice.    My current duplex is a conventional.  @Stephanie Cederdahl, I will DM you the the explanation we sent underwriter.

    Thanks again!

    0Reply
  • Mattaniah Yip
    OP
    Investor · Los Angeles & Detroit · Member since 2014 · 52 posts · 17 votes
    8y

    @Stu Wann no I did not go with a direct lender with in house underwriter.  DMin you now.

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    8y

    I don't do residential but WHY on Earth would you want FHA? FHA can have the insurance premium that stays with you forever and is a high cost. Maybe it has changed but last time I checked they keep insurance premium now permanently until you retire the loan.

    With conventional it depends on your credit for range of amount down. I have seen anywhere from 5% to 20%. 20% or more down with conventional the mortgage insurance is usually not required.

    Did you live in the other property more than 2 years? If married then up to 500k exclusion and you just sell the other property off.

    FHA is typically for buyers with marginal credit and issues a conventional lender would pass on.

    With conventional even with less than 20% down at some point you can request an appraisal to drop the insurance part once LTV falls to a certain level. My brother-in-law did it last year after owning his house for 2 years it went up a great amount in value. The 10% down conventional loan he was able to get the insurance dropped and saved about 3,500 a year. The new value made the loan amount LTV much lower below the 80% threshold.

    If you have a current property in a C area you do not like that has went up in value a bunch then you might want to sell it and cash out completely, buy your new place, and take remaining cash to invest in better areas you feel more strongly about holding long term.

    I like conventional 5% to 10% down over FHA 3.5% down everyday of the week if credit is good .

    No legal advice given.

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    0Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    8y
    @Mattaniah Yip I would definitely go with a different lender. I would never give business to someone accusing me of “fraud in the future”. It shouldn’t matter the size of the new place. “I’m moving into it because I want to”. That lender can stuff it.
    2Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    8y
    Originally posted by @Mattaniah Yip:

    Hey guys! My husband and I currently own an owner occupied duplex in Los Angeles. We found another duplex .6 miles away we planned move into and finance via FHA. We were in escrow for about 20 days and everything seemed to be going smoothly. Then I was given the run around for another week and was just denied because they didn't believe we were going to move into the new duplex. We explained to them that the new place is in a better area. If you know LA; .6 miles can make a difference in the quality of neighborhood. Has anyone experienced being denied because bank assumes you are committing fraud? Can anyone recommend a loan officer who can handle something like this?

    How long ago did you purchase your primary?  Less than a year?   I had to submit an 'address history' to my mortgage broker before on my 3rd or 4th. It came back that I needed to put 10% down and I got more of an investment interest rate, but it went through.

    As others have said, definitely go conventional. Sounds like you're doing that. If you have to buy it as an investment with 20% down, you can always put a Heloc on it later after you prove its a primary to get access to that capital again.  Maybe put a heloc on your current as well?

    I think a lot hinges on how long  ago you bought your current duplex.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y
    Originally posted by @Steve Vaughan:
    Originally posted by @Mattaniah Yip:

    Hey guys! My husband and I currently own an owner occupied duplex in Los Angeles. We found another duplex .6 miles away we planned move into and finance via FHA. We were in escrow for about 20 days and everything seemed to be going smoothly. Then I was given the run around for another week and was just denied because they didn't believe we were going to move into the new duplex. We explained to them that the new place is in a better area. If you know LA; .6 miles can make a difference in the quality of neighborhood. Has anyone experienced being denied because bank assumes you are committing fraud? Can anyone recommend a loan officer who can handle something like this?

    How long ago did you purchase your primary?  Less than a year?   I had to submit an 'address history' to my mortgage broker before on my 3rd or 4th. It came back that I needed to put 10% down and I got more of an investment interest rate, but it went through.

    As others have said, definitely go conventional. Sounds like you're doing that. If you have to buy it as an investment with 20% down, you can always put a Heloc on it later after you prove its a primary to get access to that capital again.  Maybe put a heloc on your current as well?

    I think a lot hinges on how long  ago you bought your current duplex.

    in my annual CE for my mortgage bankers license  this is often on the CE what are red flags.. and for sure this is one..  so if its auto underwriting computer kicks it out I suspect..  but I don't do these kind of loans.. but that's a question I have seen on the tests. 

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  • Charles Kao
    Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes
    8y
    @Mattaniah Yip Buying owner occupied houses multiple times with FHA low money down financing was part of problem with last crash. Having worked in banking 5 years and lending my own money I personally would not habe done this loan either. Just do a conventional or find another lender. Alot of banks and credit unions have guidelines they will not do these types of loan unless it is a clear upgrade or its moving to a different area. There are lenders that have mortgage where you can use equity off current home as equity on new home.
    0Reply
  • Pete Bauer
    Member since 2018 · 17 posts · 7 votes
    8y

    If you got your current duplex less than a year ago you'd be violating the deed of trust by renting it out which will cause the new lender to balk. Sometimes you can get an exemption for a reason like new place is bigger, in a better school district, or job relocation, but your case seems weak to me.

    0Reply
  • Mattaniah Yip
    OP
    Investor · Los Angeles & Detroit · Member since 2014 · 52 posts · 17 votes
    8y

    I bought my current duplex three years ago.

    0Reply
  • Josh Thompson
    Rahway, NJ · Member since 2016 · 72 posts · 6 votes
    8y
    I would borrow some money from your current home and do a conventional loan. PMI can be a cash flow killer
    0Reply
  • Mark H.
    Richmond, VA · Member since 2016 · 215 posts · 129 votes
    8y
    @Mattaniah Yip Not sure who you're trying to finance with, but you may also need to find a local lender who understands the local neighborhoods and that the new neighborhood would be better even if the house isnt.
    0Reply
  • Mattaniah Yip
    OP
    Investor · Los Angeles & Detroit · Member since 2014 · 52 posts · 17 votes
    8y

    @Joel Owens Thanks for your input. However, we are doing FHA because as far as I know there aren't any other programs that offer a low down payment for a multifamily, while still owning another property.

    I just discovered Home Possible via Freddie Mac thanks to @Christian Bachelder.  However, it seems you cannot own another property unless certain stipulations which we do not meet.

    If there is one please advise. My credit score is in the high 700's. Having a marginal credit score is not the only reason someone may opt for FHA.

    My goal was once the new property is to reach enough equity, I would refinance out of it into a conventional.  This is the same thing I did with my current property.

    If you know of any 5% conventional programs for multi family please advise.

    Thanks everyone again for all of your input and advise.  

    0Reply
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