Lenders wary of fake rental property investments
By Jeff Lazerson
How might a person go from living at home with perhaps a $45,000-per-year job to slapping down $120,000 (20 percent) from his bank account and qualifying for a $600,000 property?
By falsely claiming the property is an investment and using the projected rental cash flow from the independent appraisal to qualify for the purchase loan.
“Fannie Mae calls this reverse occupancy fraud,” said Robb Hagberg, senior director of fraud risk at Freddie Mac. “It’s largely in high-cost areas Los Angeles, Seattle, New York City and Chicago.”
In many of these cases, borrowers get help making the down payment from silent, undisclosed partners, sometimes from overseas.
So, what’s the harm if you and yours can’t otherwise qualify for an Orange County McMansion?
After all, Freddie benefits by charging a much higher interest rate on rentals. And Fred has more skin in the game for rentals — a minimum of 15 percent down compared to 3 to 5 percent down for a primary residence. Loans are performing really well: Freddie recently announced its serious delinquency rate dipped below 1 percent for the first time in nearly a decade.
Answer is: It’s not fair to all of the honest applicants that follow the rules of the mortgage road. Where do you draw the line? And, what if the buyers’ silent partners (those providing cash for the down payment) can’t help pay the mortgage?
Twenty percent equity can disappear awfully quickly when payments get deferred, which leads to short sales, foreclosures and lower neighborhood comparable sales.
“Let’s not fall into fraud is OK unless you don’t pay mindset,” Hagberg added.
What about a legitimate situation where the borrower doesn’t quite fit the conventional investor box? There are plenty of people who feel more comfortable investing in real estate than the stock market for example.
Provide a detailed explanation of your funds. Go overboard to document the original source of funds. Maybe it was two years of savings statements. Provide a pro-forma and a motivation letter for the purchase to be.
Lastly, get together with a reputable loan officer for your application process. Oftentimes, underwriters have a very difficult time distinguishing liars from legitimate.
Honest loan officers always run the other way when they sense something is crooked. Underwriters know this.
Jeff Lazerson - Mortgage Columnist since 2011