Breaking FHA rules.

112 Replies

@Kirk P. 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.

What If you live in an RV on the Property, and rent the house out. The RV can give you a place to store your belongings. I dont know If it would be an Isor In your current property, But your residence will at least be at that address.

It also may be very hard to convince underwriters at a bank to approve an FHA based loan on that scenario. Just a thought you could go through the whole process and then be held up. The underwriter would be concerned about why you want to leave your single family home, to then live in a multi unit property which is in a sense less appealing to the majority. Then you have to consider a reason for that and they can still deny your claim being that the underwriter may feel you are purchasing for investment purpose. Banks also don't want to get in trouble with the govt.

I just can't believe someone actually put this in writing, in a fairly public forum.

Even if you're considering breaking the law, may not want to write about it!

Anyways, yes, I feel if you to go FHA at 3.5% down just satisfy the requirements. I do believe there is a 1-year seasoning of owner occupancy. Then do what you need to do.

Disclaimer: I'm not an attorney, loan specialist, or CPA. My opinions are just that, opinions, for info purposes only.

@Kirk P. Don’t ever try to violate the law. You might not get caught for the first deal, but for sure you will feel lucky and be more willing to take the risk again, then the odds on getting caught will be much bigger and so on.

How about Airb&b your current place (bedroom), saving up some money, finding seller-financing deal, or getting a money partner?

@Kirk P.

If it's too expensive where you are at then invest somewhere out of state in your price range.

But... keep looking for opportunities where you're at (should be easy, since you are in the service industry) because you might just figure out some creative financing techniques to make a deal work, or start wholesaling the properties to someone else and gain experience and extra cash in the mean time.

@Kirk P. I empathize with your situation.  I will tell you how to get your first multi with your current situation.

1) Go to your county courthouse, meet people in the assessors office, bring treats.  

2) Ask for a list of all the multifamily properties in your county with the owner's name if available. (This doesn't work everywhere. Worst case scenario, buy a list from a provider like list source, etc.) If the owner is an entity, do a business record search and put the registered agent's name (and usually phone number) in your spreadsheet. Mail to the registered agent not the LLC.

3) Whatever list you get, crunch it by your criteria (area, build year, whatever you want) and save this new list.

4) Go to Walmart and buy a 3-pack of legal pads (white or yellow) for $2.50, odd color pens (blue, green, red) $5, and business envelopes $10 for 250.  Hit the postoffice and buy a roll of forever stamps $50-$55/100

5) Hand write 5 letters every night to the property owners saying who you are.  (A local plumber trying to get his first property, hard worker, hungry) and you "know everyone is at a different point in their investing journey, but I'd love to talk to you about buying your property if you're at all inclined to sell".  Mention you are willing to buy properties in any condition, properties with tenant issues and that you have strategies to minimize the capital gains hit when they sell (owner financing)

6) People will call you.  Call them back promptly and don't act like a big shot (something that you do not seem in danger of.  I know people get uppity, but I appreciate the genuineness of your original post)

7) When you find someone who is motivated to sell to you for whatever reason (the last two I picked up were tenants stopped paying and owner just moved out of area), start discussing my price/your terms, your price/my terms.  Negotiate a fair price (don't overpay) and owner financing at a low rate.  Make the sale easy for them.  Don't nitpick over inspection items that don't matter.  After you successfully close, shake hands, thank them, and ask if they have anything else they'd like to sell or know anyone who does.

If you are faithful with writing the letters it will get you a property in your county for under $100 in marketing cost.  Congratulations on taking action and I wish you the best of luck!  Feel free to reach out any time.

@Kirk P.

Well you’ve already received plenty of advice, but here’s my 2 cents. If you’re serious about this investing thing you gotta embrace the suck. Rent out your current residence for a year or Air bnb it and live in the third unit and enjoy the adventure.

One thing I feel obligated to point out as one of the resident slumlords here who have more experience than we should with not-so-nice real estate scenarios: the statute of limitations for mortgage fraud is 10 years. If you pull this at the start of your investing career (let's be real here, many do), and some agent or fellow investor or friend or co-worker or contractor or (highest probability) tenant in the multifamily figures it out and puts together some basic documentation, then they've got quite a few years to blackmail you. They might even not have any desire to do it, but suddenly, they might get into money trouble, need a break on the rent for a month or two...what's their obvious solution?

There are several good suggestions here you can explore and the bottom line is that your intention is to fraudulently obtain a loan to purchase not just a new home, but an income producing property and that goes beyond mortgage fraud. Is is really worth the risk of hanging out with the FBI and jeopardizing every aspect of your life?

@Kirk P. you avoid the bank with private or hard money deals. Most hard money deals will do something like charge 4 points upfront and 12% interest. That's much closer to the 3.5% you're looking for, and it's jail free.

 How illegal??? As if there are grades of illegal? Illegal means AGAINST THE LAW. It either is or it isn’t. If you are ever going to be looking for employment or people to date or doing anything that will require a background check, I would suggest removing this thread. This glimps into your moral compus is not what you want future employers, mates, and leaders to see. If I were considering your for employment I would assume you would think it is OK to steal, as long as it wasn’t “too much”. If I were considering you to date, I would assume you would cheat - as long as you wouldn’t get caught.

Originally posted by @Kirk P. :

@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.

@Kirk P. FHA flipping rules are 90 days before you sale it. So no you shouldn't get Caught if you want to rent it out but you would get caught if you tried to sale it. I do know someone who got caught by trying to refinance. They made them pay the 20% down payment

@Antonio Flue think about it there in the business to make money and they can't do that with you in the big house. Most times they don't do anything. In your case you are also going to have to explain why are you downsizing. You could say it's close to work. Also FHA do not allow you to buy homes with that much needed work...well they do but it's very hard. Your best bet is to get a lender that would allow you to get a second loan to make up the 20% or use the equity in your home.

@Kirk P. a HUD special agent would simply conduct/set up technical surveillance for a bit and watch you go home to your residence. Another one might watch the triplex and see you don't spend the night there.

They would document the AirBnb ads.

Monitor where your mail goes, etc, etc.

It really wouldn’t be that hard to figure out.

@Kirk P.

First of all thanks for posting the question. I’ve thought about it before and I’m sure others have too, so kudos to you. Obviously you’ve gotten plenty of reasons why you shouldn’t do it.

As for your other options for acquiring this property or others, I would say try to find a partner, get money from friends/fam, or HML. If you're new (like me) you can't just go asking for money and expect people to give it to you based on your experience/ history because you have none. But, do everything you can to research the deal. Accurately asses your ARV, repair costs, ROI, etc... and show people that you really know what you're talking about and become a total expert on that particular property. If the deal is right, someone will give you the money.

If your gf is not willing to move into the other property and rent out your primary then don’t do it. I don’t think you should prioritize your investing ahead of a relationship and the feelings of your significant other.

@Kirk P. talk to a lender to see if you would even qualify for the FHA loan. My lender told me that because I already lived in a sfh home, the underwriters wouldnnot approve me moving into a 4plex, duplex, or triplex because it would seem like I was downgrading in home size and underwriters didn’t like that. So essentially because I bought the sfh (even with a conventional loan) I would not be approved for a FHA loan for a small multi-family (unless it was in another state and I could prove that my job was moving me there, or some other important circumstance). So ask a lender if you think underwriters would even approve you first.

@Kirk P.

Check out there is a discussion about Fannie Mae Home Path Program. Sounds like it’s a 10% down, investor program.

I haven’t used it, just happened to listen to that episode their week.

The short answer is; you will not be able to finance a multifamily with an FHA loan. The plan you describe is not smart at all, and you should scratch from your life the person that thought it was a good idea to engage in mortgage fraud, which is a crime punishable by up to 30 years in federal prison and a $1,000,000 fine. The ‘plan' you describe falls under Fraud for Profit. Fraud for Profit aims not to secure housing, but rather to misuse the mortgage lending process to steal cash and equity from lenders or homeowners. The FBI prioritizes Fraud for Profit cases.

When obtaining a mortgage loan via Fannie Mac, Freddie Mac or Ginnie Mae, the quasi-governmental agencies that buy most of the mortgage loans in America, you will be asked to state whether you are buying this new home as an owner occupied or as an investment property. Your answer is based on the intentions you have at the time of purchase, all the way to the closing. If you change your mind after closing and choose not to move to the new home, fraud would have not occurred. Because you have already announced the fact that you will not be moving to the new triplex, there would be fraud if you finance this home with FHA, or most any other conduit.

There are other reasons why you will not be able to obtain an FHA, or conventional loan here. To use rental income on a departing residence, the FHA 100 mile rule must be followed. Meaning that the new home must be at least 100 miles away from your departing home, otherwise you will need to carry both mortgage loan payments and be used against you in the DTI formula.

The other reason is that no Underwriter will ever believe that a couple living in a single family home, with the privacy benefits that it entails, would ever move to a 2-4 family home where they will have tenants all around them. Even if paying many times over the price for the multifamily than the value of your present one unit home.

The repercussions of any fraud, or of engaging in ‘non-permissible’ practices, can carry severe consequences, especially in the mortgage world that we live after the 2008 financial crash. The FBI is involved in ALL fraudulent cases that are reported by lenders. On this page ( you can see the amount of people going to jail weekly for similar situations as the one you described.

You do not want to commit fraud not just because you may get caught, but because is not the right thing to do. We all pay for these actions with higher rates, and in the form of loan programs getting more restrictive. Besides, you’d be a happier man with a clear conscience in knowing you have done the right thing by staying true to yourself not compromising your integrity, while remaining a free man, albeit with less properties. New doors will open for you in your life in ways you never thought where possible.

@Kirk P. I believe most of the disclosures are 30 days. We have done this a few times. Buy, do some rehab and then move in.

I can’t say we have always hit the 30 day mark because sometimes our rehab goes a little long.

But our intent is always to move in and we live there for a year or longer.

If we aren’t going to live their we get a non owner occupied house.

It’s not worth it to break the law and go to jail. But you know what IMO it’s more important to do things ethically.

@Kirk P. If you do not currently have a FHA mortgage and you want to buy a multifamily with FHA, I would thin the underwriters would allow it. You would have to write a letter of explanation as to why, but I don't think you would have a problem. As long as you move into one of the units. Moving into a multifamily to help offset your mortgage payment and save money is a perfectly good reason. I'd run it by my underwriter first o make sure though. However, if you already have a FHA mortgage, you cannot have more than one at a time.

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