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!

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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...? 

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  • Jess White
    Rental Property Investor · San Jose, CA · Member since 2018 · 152 posts · 159 votes
    7y
    @Kirk Perecich I really respect the idea that you asked the question. Thanks, I think it really helped a lot of people who are afraid to ask things like that.
    3Reply
  • David Yusupov
    Atlanata, GA · Member since 2019 · 8 posts · 1 vote
    7y

    @Russell Brazil I’m new here. I thought about fha too. So, moving out after one year living in the property and renting out - it’s legal and not a fraud?

    0Reply
  • Ryan Harsche
    Lender · Philadelphia, PA · Member since 2018 · 58 posts · 17 votes
    7y

    @Kirk Perecich I am a mortgage lender. This is a terrible idea as it qualifies as mortgage fraud. Which is technically punishable up to 30 years. You will also sign a mortgage and on the mortgage, there will be a clause that requires you to move into the property within 60 days and live there for up to 12 months (assuming no unexpected circumstances: e.g. your employer moves your position) all of this said, using a FHA 203k or a Conventional Homestyle Renovation loan to purchase a home can be very beneficial. But you do want to ensure you follow the law and actually move into the property.

    1Reply
  • Bill Rich
    Lender · Marlton, NJ · Member since 2016 · 126 posts · 44 votes
    7y

    Here's the biggest thing you need to realize, setting aside the mortgage fraud part of the equation. Underwriting will ask for a motivation going from a single family home to a multi family since that is considered a downward move and your motivation is what? Being an investor? I dont know a DE UW around who wouldn't sniff this out before it ever remotely gets to closing. 

    2Reply
  • Oliver Bergsjo
    Rental Property Investor · UT · Member since 2018 · 7 posts · 5 votes
    7y

    @Kirk Perecich if your going to do anything do it legally and be moral about it otherwise don't do it

    1Reply
  • Philip WillisPro Member
    Rental Property Investor · Imperial, MO · Member since 2017 · 5 posts · 10 votes
    7y

    @Ryan Harsche just wondering if you could provide other legitimate reasons for not moving into a fha home? You Gave an example of an employer moving you, but are there others? For instance, I buy a home that I love and intend to stay in, but then a week after closing a different home is

    Listed that I absolutely love...

    0Reply
  • Bill Rich
    Lender · Marlton, NJ · Member since 2016 · 126 posts · 44 votes
    7y

    Phillip loving a home is not a good reason with FHA. It needs to make sense. Work relocation, increase in family size etc.

    3Reply
  • Ryan Harsche
    Lender · Philadelphia, PA · Member since 2018 · 58 posts · 17 votes
    7y

    @Philip Willis you're messing with fire.  I would never suggest anyone to sign a document stating they intend to move into the property within 60 days and live there for a year if they do not fully intend to do so.  

    1Reply
  • Bill Rich
    Lender · Marlton, NJ · Member since 2016 · 126 posts · 44 votes
    7y

    Bottomline is FHA does do door knock audits to confirm you a re living in the home and if you aren't they will call the loan immediately. Like Ryan said your playing with a flaming tank of gasoline

    1Reply
  • Philip WillisPro Member
    Rental Property Investor · Imperial, MO · Member since 2017 · 5 posts · 10 votes
    7y

    Let me rephrase. Is there an actual list of reasons why someone could legally go against this contract? Is the key word in the contract “ intent”? I could intend all kinds of things. I’m asking this question for people out there that might feel they have a fairly legitimate reason for moving out within a year, or for those that already have moved out of their fha loan home and now in reading this post are scared to death that they are going to go to jail. Are there going to be a bunch of new investors scrambling to move back into their prior homes for fear of jail time?

    1Reply
  • Philip WillisPro Member
    Rental Property Investor · Imperial, MO · Member since 2017 · 5 posts · 10 votes
    7y

    I asked my lender this same question a few years ago and his response was simply that if someone wants to be a serious investor then that one indiscretion could potentially jeopardize their investing future forever, at least in regards to building a team of people with integrity. I think that the best people you could find to have on your team would not agree with purposefully going against owner occupied rules just to get a deal.

    1Reply
  • Ryan Harsche
    Lender · Philadelphia, PA · Member since 2018 · 58 posts · 17 votes
    7y

    @Philip Willis I mean it's honestly this simple.  Occupancy Fraud is still Fraud.  So if you want to go against it, you are committing Fraud.  You are lying on your mortgage application, which is punishable by law with up to 30 years in prison.  It's also not enforced by your local town police, it's enforced by the FBI.  Outside of that, I can't find another reason why you shouldn't do it. 

    0Reply
  • Ryan Harsche
    Lender · Philadelphia, PA · Member since 2018 · 58 posts · 17 votes
    7y

    @Philip Willis ultimately, not sure what the FBI would actually do if they found out. It would be up to FHA. FHA would most likely call the Note due immediately and then pursue legal action based on their evidence.

    0Reply
  • Eric Carr
    Real Estate Broker · Los Angeles, CA · Member since 2017 · 658 posts · 293 votes
    7y

    I am not advocating that you do this, but I know people who have. Your chances of getting caught? Not high. You could do it, rehab all units, refinance out of it asap. 

    Some banks will do 10% down and no MI. 

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

    @Shelby Ek Thanks

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

    @Jess White Thanks for saying that. I have people private messaging me about it because if they commented publicly, people would chew their head off

    1Reply
  • Bill Plymouth
    Real Estate Agent · Philadelphia, PA · Member since 2018 · 416 posts · 396 votes
    7y

     @Account Closed There are people who do this.  As a real estate agent, I've come across it a few times.  The people who have done that also tend to cut corners in other ways.  In each case I have decided not to work with those people.  If they are willing to lie to the government, why would they tell the truth to me.  

    What I am saying is that even though you may be a person of integrity, actions like this can make it seem otherwise.  It could effect your career moving forward.   

    Good luck and I hope this helps!

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

    @Ryan Harsche Thanks

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

    @Bill Rich Thanks for the reply. So you don't think I could get an FHA loan even if I was to move in to it and rent out my old home?

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

    @Oliver Bergsjo I agree. I didn't really know if the whole "living there for a year" was a big deal or enforced or unethical. That's why I asked the question. I have no intention of doing the plan. And I agree about being moral. Morals are my primary why in the first place. Helping charities that help animals is my biggest motivation

    0Reply
  • Bill Rich
    Lender · Marlton, NJ · Member since 2016 · 126 posts · 44 votes
    7y

    @Kirk unless there is a bonefide reason to go from a single family to a multi family, like increase in family or work relocation, no shot. 

    0Reply
  • Chris R.
    Rental Property Investor · Southern NH · Member since 2017 · 87 posts · 100 votes
    7y

    Where money, rules and the government are in play together, don't tempt fate.  You're putting a lot more than your real estate investing ability in jeopardy with this plan.  I can't put a scenario together that would warrant taking this kind of risk.     

    0Reply
  • Jason Parker
    Rental Property Investor · NH (new hampshire) · Member since 2017 · 53 posts · 22 votes
    7y

    @Kirk Perecich

    Can you just find a different MF that your GF would like to move into? I've seen seperate houses on the same property for sale. One Mortgage, multiple units but similar to having your own home. Will this work?

    I'm new at this and don't own a property yet. Im very much in the beginning stages. Got the preapproval for a mortgage, worked numbers on a bunch of properties and am starting to work with an agent. Ive read a bazillion books, listened to webinars and all sorts of podcasts. Im so excited about this that I'm sure I could sway anybody's opinion into moving into a rental property for the HUGE financial freedom that it brings in the long run. I actually worry that I talk about it too much but now my wife is actually sending me links to properties she likes. Which is AWESOME. Have your GF do some MF shopping with you, let her pick out some properties and get excited.

    Thoughts?

    1Reply
  • Victor S.
    WorldWide · Member since 2016 · 1k+ posts · 1k+ votes
    7y
    Originally posted by @Account Closed:

    @Jordan Moorhead Yeah I'm willing to move, but my girlfriend isn't. And if she's not on board, I'll just have to do some other plan. And yeah I had no interest in going around the law in any way

     Like Bob Marley used to sing: "No woman, no cry." Think with your big head, my friend.

    0Reply
  • Aaron Cooper
    Investor · Jacksonville, FL · Member since 2015 · 76 posts · 22 votes
    7y

    @Kirk Perecich trust me, we all think about but it's a terrible idea. My brother moved out of his duplex at month 10 and by month 11.5 he had a notice to pay a $10,000 initialfine plus legal fees and bunch more crap. He didnt even finance it! He just purchased a home in cash on first look properties where you must live in then for 1 year. Trust me they find out about people pushing the rules and it's not worth it.

    0Reply
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