Breaking FHA rules.

112 Replies

My girlfriend and I live in a house (with a conventional mortgage) that we don't wish to move out of. I want to get into rentals, but don't yet have the capital to put %20 down on a sfr in my area. I do however have the money to put 3.5% down on a duplex or triplex. Someone recently gave me the idea of acquiring a triplex with an fha loan, rehabbing two of the units, renting them out, and taking my time with the third rehab. Or even rehab all three, rent two out and air b&b the third until the one year is up. Then I would rent out the third as well. Clearly I'm talking about getting an FHA, and then breaking the rules by not moving in.

My questions are:

1. What is your take on this?

2. What are my odds of getting caught?

3. What are the ramifications of being caught?

4. Hypothetically, if I couldn't possibly get caught, is this plan a smart one?

5. Should I refinance (brrrr style) after renting two out, or after the year has past and I have all three rented out, or not until the mortgage is paid down enough to remove the PMI?

Other notes:

I'm in Illinois

I'm a plumber

I have a good credit score

Sorry if my post is dumb


do you value your freedom more than getting into real estate because they have ways to find out and It’s considered fraud punishable with prison time and huge fines or a due on sale . Is it worth the risk ? I would say no . Why don’t you do what others do and save for the 20% ? There’s other ways to buy a property than just going to the bank like most people do . I would rather deal with the burden of saving up more cash than dealing with “ bubba” in a prison cell

@Dennis M. Thanks for the response! I'm also wondering how anyone would prove I don't live there if I air b&b it, considering people air b&b their personal homes all the time. Unless air b&b is illegal in an FHA home in general? Or if I was simply rehabbing it over the whole year, could I just say I am rehabbing it before moving in? Is it legal to rehab your house in the first year of an FHA loan? Or maybe you have to live the while you rehab? Clearly I don't know any of this stuff Haha

Originally posted by @Kirk P. :

2. What are my odds of getting caught?

 Are you asking about your odds now, or are you asking about your previous odds back before the very first google search result for "your name real estate" is your biggerpockets profile that links to this thread...? 

@Chris Mason Thanks! Yeah good point Haha. I wasn't planning on doing this, but when the idea was floated to me I did get very curious. But it looks like I won't be doing it now anyway. Also, I didn't realized quite how illegal it was. Years in prison must mean it's a big deal. For all I knew, it was a fine it something

If yourva contractor you have one up on most people investing in RE . I’d be looking at doing rehab work on distressed properties and not using a bank at all . So many ways to find RE there’s no sense in trying to stay in a box 

So then my next question is, how much time does one have to move in? Could you rehab and then move in, or do you have to be there within a narrow time after closing?

@Dennis M. How do I avoid the bank? I'd be saving up money for 60 years if I had to buy even a distressed home with all cash. Even saving for 20% of something in my area would take me years

Chances of getting caught? Not particularly high, but people do get caught. It is mortgage fraud. And taking your time rehabbing doesnt do anything, you need to occupy the property within 60 days of closing.

Why not just buy it, move in, satisfy the occupancy requirements, then move out sometime in the future.

You can finance a good deal lots of different ways. Friends and fam, bank, hard money lenders, etc. If it's a good deal you won't have a problem finding a partner. Especially if you're a contractor that can do the labor to rehab it.

I know you mentioned that you didn't want to move out of your current home but if you're willing to suck it up you could obviously rent out your home, move into one of the units for a couple years to satisfy FHA requirements and then move back to your original home. Just a thought.

If it needs significant work it may not qualify for FHA anyway.

I'm with Russell. Save 5% (conventional ftw), then move in for a year. Problem solved.

P.S. I guess it's true that most criminals get caught over simple things (like using your real name on a forum and asking for advice on breaking the law).

Hope you're at least working on your Eskimo kiss technique if you do end up trying to play games with the FHA.

@Kirk P. Yea I would say satisfy the year then perhaps execute parts of this business plan while you are in it. Yes cut on profits but you start clean.

Paranoia is bad for business lol

Hard money loans and or fix or flip loans. Then BRRRR!!!

@Kirk P. ...I think the analytical thought process to work around rules is good but you should not proceed to break FHA rules or any laws. Aside from any criminal penalty, they can call the loan due immediately and if you dont have enough equity (only 3.5% down) you could end up filing for bankruptcy, setting yourself back further. I asked this same question when I was 23 and first starting out. I was quickly answered by a loan officer/investor who said they do check these things.

When a lender has the option to call the loan due you are at risk...rates are going up. Their money has better returns loaning it out today @ 5-6% vs 3% a couple years ago so they have more incentive to call a loan due if the option is available (also think transfer of title to LLC here).

Think about investing as a weight loss journey, slow and steady. If you plan to be wealthy long term, you will not break laws to gain a buck or two. You'll use the many available, law abiding tax benefits.

To add- I don't think anyone has ever preferred living with tenant over a single family residence. The financial impact is nice, but living with your tenants isn't preferable. That's not to say it's terrible either. Sacrifice for a year and I doubt you'll regret it.

@Kirk P. I can't speak for everyone, but if I sign a contract, which is what happens when you take out a loan like FHA, I actually uphold my contractual obligations. If I don't want to uphold those obligations, I don't agree to the contract. This may mean I can't do business with someone or get a loan I'd like to have or drive the Maserati I've always wanted, but I value my word more highly than those other things.

@Chris Mason

Has the best response. Your chance of being caught now after this thread is close to 100% if there is any question. The proof is in this thread. Don’t risk it.

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