Refinancing as an owner-occupant when you have recently moved

4 Replies

Hey Bigger Pockets crowd, I have a question about mortgages and refinance options that one of my investment clients recently asked me about.  My question is specific to the current lending climate so Google was not very helpful.  

I have a client who invests into a Roth IRA with me so he asks me a lot of tax-related questions. I told him mortgage rules were not my forte, but he wanted to know my opinion anyway. He moved last year with his wife and daughter into a new house, and rents out his first home to his brother and fiancé. Many of the utilities are still in his name and he receives cash for the rent every month, which is why he thinks his plan may work. He wants to know if he would be able to refinance his first home as an owner-occupied mortgage even though he no longer lives there (and has not lived there since January of 2018). I told him this would be a bad idea, and is likely illegal. I assume it would be easy for them to find out when the mortgage company asks for his tax returns for proof of income (assuming all lenders even ask for your tax returns), they will see that he has a primary residence and a rental property. Also, when they run his credit they will see two mortgages.

From my various Google searches I found out that even some lenders require that you live in a home for one year after refinancing (not sure how they would enforce that, or what would happen if they found out you moved right away).  I bought my home in 2010 right after lending standards became much stricter following the financial crisis.  I have no idea what it is like today.  How thoroughly do lenders check things like this when someone applies for a refinance in 2019?  I would assume the day you move out a property you can no longer be legally refinanced as an owner occupant, but maybe there is some sort of grace period or lenders that are notoriously lax in checking on these details.  I assume that lending requirements are still very strict, but maybe some lenders only ask for a pay stub and a utility bill to prove residency instead of tax returns, in which case his plan could work.  Although every lender will definitely still run his credit, I cannot imagine two mortgages on his credit file not raising a red flag but he wants to try it anyway.  He believes there is little chance of him getting in legal trouble, only denied a new mortgage.  Do lenders actually go after borrowers for this?  This seems like an extremely common situation that would be difficult for lenders to prove where you live, especially in California where half the marriages end in divorce.  Hypothetically, he could live in that house if he and his wife were separated.  If the worst thing that can happen is a denied loan, it could be worth trying to save 250 dollars a month.

Also, would the proper thing be to advise that my future clients refinance their home before moving out if they plan on using their first home as a rental, or do lenders actually go after borrowers who refinance and then immediately move out?  Any help here would be appreciated. 

Quite a long question, I know.  Thanks for taking the time.

Erik

This man does not live in the house, but wants to convince the bank he lives there by signing a CONTRACT that states that he does. Thereby inducing the bank to take on a financial risk that they otherwise would not take on. Again, CONTRACT. I’m amazed people keep asking this question. What part of this does not sound like fraud?

The correct question is not, can he do this. The correct question is can he get away with mortgage fraud?

The answer is it happens all the time. Many people do it and don’t get caught. Doesn’t mean it’s not fraud. Doesn’t mean it’s not a huge risk. Not worth it in my opinion.

Originally posted by @Erik Bremer :

Hey Bigger Pockets crowd, I have a question about mortgages and refinance options that one of my investment clients recently asked me about.  My question is specific to the current lending climate so Google was not very helpful.  

I have a client who invests into a Roth IRA with me so he asks me a lot of tax-related questions. I told him mortgage rules were not my forte, but he wanted to know my opinion anyway. He moved last year with his wife and daughter into a new house, and rents out his first home to his brother and fiancé. Many of the utilities are still in his name and he receives cash for the rent every month, which is why he thinks his plan may work. He wants to know if he would be able to refinance his first home as an owner-occupied mortgage even though he no longer lives there (and has not lived there since January of 2018). I told him this would be a bad idea, and is likely illegal. I assume it would be easy for them to find out when the mortgage company asks for his tax returns for proof of income (assuming all lenders even ask for your tax returns), they will see that he has a primary residence and a rental property. Also, when they run his credit they will see two mortgages.

From my various Google searches I found out that even some lenders require that you live in a home for one year after refinancing (not sure how they would enforce that, or what would happen if they found out you moved right away).  I bought my home in 2010 right after lending standards became much stricter following the financial crisis.  I have no idea what it is like today.  How thoroughly do lenders check things like this when someone applies for a refinance in 2019?  I would assume the day you move out a property you can no longer be legally refinanced as an owner occupant, but maybe there is some sort of grace period or lenders that are notoriously lax in checking on these details.  I assume that lending requirements are still very strict, but maybe some lenders only ask for a pay stub and a utility bill to prove residency instead of tax returns, in which case his plan could work.  Although every lender will definitely still run his credit, I cannot imagine two mortgages on his credit file not raising a red flag but he wants to try it anyway.  He believes there is little chance of him getting in legal trouble, only denied a new mortgage.  Do lenders actually go after borrowers for this?  This seems like an extremely common situation that would be difficult for lenders to prove where you live, especially in California where half the marriages end in divorce.  Hypothetically, he could live in that house if he and his wife were separated.  If the worst thing that can happen is a denied loan, it could be worth trying to save 250 dollars a month.

Also, would the proper thing be to advise that my future clients refinance their home before moving out if they plan on using their first home as a rental, or do lenders actually go after borrowers who refinance and then immediately move out?  Any help here would be appreciated. 

Quite a long question, I know.  Thanks for taking the time.

Erik

 The FBI handles Mortgage Fraud cases and can issue a maxium penalty of 5 years in federal prison and a 250K fine.  Tell that to your client.

Wow @Erik Bremer .  Are you really asking if it is OK if someone lies to get what they want, even though they are committing loan fraud? So, if you walk into a room and there is a pile of money that doesn’t belong to you, are you going to take it because you think no one is looking?

Thanks everyone for the replies.  What about the rules of refinancing for a home that you still live in, but plan on moving in the next 3-6 months?  Is the rule about staying one year after a refinance universal, or do some lenders not have that caveat?  Is that a government rule, or just something most (or all) lenders do to avoid the extra risk of someone taking on another mortgage right after the first one closes?