I live on the west coast and cannot afford housing here. I am trying to do my first deal with a duplex on the east coast. I have family there in the area, so I feel comfortable not being there. I have a Lender who is willing to give me 100% financing for the duplex that I dont plan to live in. the property is about 90k and I told him I dont have downpayment. He told me if i stated owner occupied that I could get 100%, if I state NOO then he could only LTV 85%, and that I would need 15% down. So I asked him can I get in trouble for this and he said no one would find out. He went and asked his boss even and his boss said it would be almost impossible to find out. I want this first deal so bad. I have so many friends that have done this and nothing ever happened to them. I just need my first deal to get my feet off the ground. I cant qualify for a NOO loan because my score is 600 and I have a BK7 that is 1 year seasoned. Please advise me what to do.
Well, this is done every day, but it is mortgage fraud and if you are discovered you and the broker could be sentenced to prison and/or substantial fines, so if that risk is worth taking, then go for it.
rbaxter is right…it is illegal and it is unethical. These funds are earmarked for families that NEED a place to live in and cannot afford the downpayment, not for investors that can’t figure out a better way to finance the amount…
I also personally feel that you are selling your integrity and it apparently has a price tag not to exceeding $13,500…
Keith
I am glad to see that ethics are important. My realtor told me recently that about 43% of homes sold in our are they buyer has nothing down. A lot of sellers are making consetions to the buyer. good responses!
NDI
You should do some more searching, perhaps you can find 100% financing out there, I use it and many people do it, you still need closing costs and perhaps they have credit score cutoffs, but I would think it would be available.
If not I have found several easy ways to do 100% other than the lender giving the full 100, so send me a note if you want.
Justin
Vegas,
There are loan programs out there that offer 100% financing to NOO borrowers. Is this a stated income or full doc loan? Even if you can’t get 100% financing, you can 955 financing all day long as long as you have decent credit (660). Lying about occupancy is just not a good way to start off your investing career. Your going to have to sign documents at closing stating that you do intend to occupy the property, and knowing that you never intend to live there you would be committing fraud. While you are correct it is almost immpossible to detect there are many scenarios where you could get busted such as if you have to make an insurance claim. What is even worse is that your mortgage broker is pushing you to do this. If he is so positive that it is “ok” to do;then ask him to put it in writing that he suggested that it was ok for you to set-up the transaction in this manner, and see what he says. That should give you your answer on whether it is the smart thing to do.
You can probably get the deal put together as NOO (i agree the other option is not worth the risk & illiegal).
Whats the property worth? Maybe the seller will carry a second (if you dont qualify for 100%, which I am not sure you dont)?
Let me know if I can help.
You can put the deal together and make it legal. Just place the property in a land trust and make your tenant(s) a beneficiary of the trust. That way, an “owner” is occupying the property.
Da Wiz
Landtrust may be legal, but I think the point that is being made here is that it is not ethical.
Good point Hammertime! There are a multitude of ways to cheat the system. The point is, no matter how you want to spin it…it is cheating and it is unethical.
This is not about cheating the system. He can achieve his goal without having to lie. It is about how to legally adhere to the rules. The problem is how to legally get a better loan. The answer is to have multiple ownership. I don’t find this to be unethical at all.
If vegasnick has the right to legally (under Federal law) achieve his goal and he can do so without breaking any laws or hiding anything, what is wrong with that?
He owns a property across the U.S. What better way to make sure the property is properly managed than to make his tenant(s) a beneficiary(s) of his trust if he/they will live in it, maintain it, and make the payments on time every month? The IRS considers the tenant/beneficiary an owner for tax purposes and he gets the mortgage interest and tax writeoffs. And what is wrong with him sharing future profits with his co-owner?
Also, there is no due on sale clause violation because land trusts are exempt. There is no need to hide anything from the lender.
Hammertime, land trusts are completely legal and ethical. I don’t think you know much about them. Land Trusts has been used throughout the United States for 100+ years. They convert ownership of real property to ownership of personalty, even though such ownership is characterized for income tax purpose as ownership in real estate. When you hold properties in a Land Trust, it makes it easy to have multiple owners. In a Land Trust the only signature that is required is that of the Trustee.
There are eight ways to take title, six of them allow for co-ownership:
- Community Property;
- Joint tenancy;
- Tenancy in Common;
- Tenancy in Partnership;
- Title Holding Trust
- Community Property Right of Survivorship.
For the pros and cons of each and a truly independent analysis, here is an excellent report from Chicago Title Company that should answer many questions. I find it to be very helpful and recommend that you download it to have on hand. Enjoy:
http://www.chicagotitle.com//pdfs/8ways.pdf
Da Wiz
Here’s the problem as I see it.
In order for Vegas Nick to get the property, he first has to qualify for 95-100% financing in his personal name. From a previous discussion with him, I dont think the # of tradelines needed may be there. (cant remember for sure)
Now if there is a loan somewhere that he can qualify for the lender is not going to set this up with vesting into a land trust. This would have to be done after the closing. The loan application will be signed with him disclosing if “He” plans to owner occupy it.
Here’s another thought even if it is remotely legal. If we as mortgage brokers have common knowledge about something that could affect the lenders decision to make the loan, we’re required to disclose that. I dont think that many underwriters would approve the loan when we tell them that the buyer (on application) is not going to live in it but the tenant will be a beneficiary.
I’m familiar with using the Landtrust system to have buyers purchase properties and and get cash back via being a beneficiary of the seller’s trust. Since most lenders will not want to see the beneficiary list this could easily slide by. Legally the process works but it comes down to disclosure with the lender again if the broker is made aware of it.
I’ve spent several months calling lenders and speaking to compliance/regional underwriters/product specialist/anyone who could verify whether or not this practice would be acceptable if brought to their attention.
Out of 15 major lenders, most specializing in investment loans, only 1 would possibly entertain doing this. Samething with lenders paying assignment fees. Researched over 20 lenders and only found 1 who would allow the assignment and pay out the fee on the hud.
So yes, there are a lot of ways for other individuals to “get around” guidelines. Whether legal or illegal, brokers have a responsibility to disclose and let the lender determine if they want the loan.
That’s an excellent answer. Of course he has to get the loan first. Once he has it, he can legally place the property in trust and name a co-beneficiary who will make the payments on a lease.
This transaction will depend on the wording of the “Owner Occupied” clause. If it just says the property must be owner occupied for a year, he will be safe because his tenant/beneficiary will also be an owner.
If it says he, specifically, as an individual must live in the property, then it would be a violation. It is all dependent upon the wording.
He does NOT have to tell the lender that he is going to place the property in a land trust in advance. When he deeds the property to his Trustee who takes legal and equitable title, the bank will be made aware as it is public record, but prevented from taking any steps due to the DOSC exemption.
Any assignment to a co-beneficiary is of personal property and there is no assignment fee. It is a legally unrecorded and private event and simply involves a transfer of personal property.
You can thank Chicago Title for making the land trusts so iron clad and private. They streamlined the land trust in the 1920’s for the benefit of Al Capone and the wealthy have taken advantage of its privacy features for decades since. Interesting scenario.
Da Wiz
Please see Sect VIII (Declearations), line l, page 4 of the Uniformed Residential Loan Application (1003).
It reads as follows:
l. Do you intend to occupy the property as your primary residence? Either Yes or No. Straight forward, eh?
You kept referring to “He”. “He does NOT need to…when he deeds…” My point is that the borrower may end up doing or saying anything that “He” wants, but the MORTGAGE BROKER needs to step up once they are aware. If the loan goes through processing, underwriting, and closing without them knowing then so be it.
Technically, when he goes to sign his loan docs, he can’t say that it will be orwner occupied. At that point the trust has not taken ownership. The borrower is signing in his own personal name. So there is a brief period between recording until the Trust is on record. When he signs, he is acknowledging that “He” is going to be living in the property. If the loan docs could be signed upfront by the Trust, then I’d say there might be room for discussion. Not so. Final opinion.
Ben,
In the case you have given, I would not recommend it. It’s one thing if it can legally be circumvented, but that 's pretty straightforward.
Da Wiz