Breaking FHA rules.

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Breaking FHA rules.

Account Closed
Contractor · Westmont, IL · Member since 2018 · 44 posts · 31 votes

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

Thanks!

7Reply
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Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
7y
Originally posted by @Account Closed:

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...? 

52Reply
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  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y

    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

    32Reply
  • Account Closed
    OP
    Contractor · Westmont, IL · Member since 2018 · 44 posts · 31 votes
    7y

    @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

    0Reply
  • Clifford Paul
    Rental Property Investor · Member since 2018 · 483 posts · 956 votes
    7y

    The average length of mortgage fraud sentence was 20 months in 2017. Here's a great Link with all the numbers.

    https://www.ussc.gov/research/quick-facts/mortgage...

    14Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    7y
    Originally posted by @Account Closed:

    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...? 

    52Reply
  • Account Closed
    OP
    Contractor · Westmont, IL · Member since 2018 · 44 posts · 31 votes
    7y

    @Clifford Paul Oh that's rough

    2Reply
  • Regina Jones
    Flipper · Hartford, CT · Member since 2017 · 89 posts · 10 votes
    7y

    wow

    0Reply
  • Account Closed
    OP
    Contractor · Westmont, IL · Member since 2018 · 44 posts · 31 votes
    7y

    @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

    2Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y

    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 

    1Reply
  • Account Closed
    OP
    Contractor · Westmont, IL · Member since 2018 · 44 posts · 31 votes
    7y

    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?

    0Reply
  • Account Closed
    OP
    Contractor · Westmont, IL · Member since 2018 · 44 posts · 31 votes
    7y

    @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

    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y

    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.

    [email protected]301-893-4635Podcast Guest on Show #192
    District Invest Group546 Reviews
    WebsiteView Page
    21Reply
  • Aaron Flake
    Real Estate Agent · Mukilteo, WA · Member since 2018 · 124 posts · 148 votes
    7y

    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.

    8Reply
  • Lee Bell
    Real Estate Appraiser · Isabella lake, CA · Member since 2018 · 628 posts · 491 votes
    7y

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

    6Reply
  • Victor S.
    WorldWide · Member since 2016 · 1k+ posts · 1k+ votes
    7y

    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).

    15Reply
  • Jim K.
    Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
    7y

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

    1Reply
  • Bjorik Mutize
    Real Estate Broker · Minneapolis, MN · Member since 2016 · 530 posts · 398 votes
    7y

    @Kirk Perecich 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

    2Reply
  • Pete Reed
    Rental Property Investor · Member since 2018 · 26 posts · 9 votes
    7y

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

    2Reply
  • Account Closed
    OP
    Contractor · Westmont, IL · Member since 2018 · 44 posts · 31 votes
    7y

    @Russell Brazil Yeah I'm thinking the same thing. Thanks!

    0Reply
  • Account Closed
    OP
    Contractor · Westmont, IL · Member since 2018 · 44 posts · 31 votes
    7y

    @Aaron Flake Thanks, good idea!

    0Reply
  • Chris Virgil-Stone
    Rental Property Investor · Cape Coral, FL · Member since 2015 · 206 posts · 83 votes
    7y

    @Account Closed...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.

    4Reply
  • Chris Virgil-Stone
    Rental Property Investor · Cape Coral, FL · Member since 2015 · 206 posts · 83 votes
    7y

    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.

    0Reply
  • J Chad Davis
    Rental Property Investor · Galveston, TX · Member since 2018 · 49 posts · 29 votes
    7y

    @Kirk Perecich 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.

    5Reply
  • Jerry Padilla
    Lender · Rochester, NY · Member since 2014 · 3k+ posts · 1k+ votes
    7y

    @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.

    0Reply
  • William Harrison
    Member since 2018 · 6 posts · 3 votes
    7y

    @Kirk Perecich would you be open air b&b the place you live now and stay in the duplex/triplex for the year?

    2Reply
  • Lynnette E.
    Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes
    7y

    I am in escrow for a Fannie Mae repo and on the forms it clearly stated that if I was not owner occupant and claimed I was then there could be a fine up to $10,000, plus prison time.  

    I was purchasing as a non-occupant, and marked that box, but the warning is on the form.

    They can find out if you are really living there based on lots of things; what address is on your driver's license, where is your vehicle garaged on your insurance, the investor who lost out will drive by and verify and turn you in, what address does your employer have for you, where does your mail go, what address was your taxes filed with, what is your voter registration address, what address does your banks have, where do you have utility accounts, etc.  

    Owner occupants had 60 days to move in on the form.

    3Reply
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