Avoiding Occupancy Fraud

I found a good deal on a home. It’s the first home I’ve ever owned. I could save rent money by living it in or make money by renting it. I wasn’t sure what I’d do but I bought it with an FHA conventional bank mortgage. Now that the previous owner is gone, although I have not gone through any hardship, I don’t want to live there (loud neighbors, house needs a little work, etc). But in the closing documents I agreed to move in within 60 days and stay for a year. Only after the closing did I learn that if I don’t move in, I’d be committing occupancy fraud.

What can I do to avoid legal troubles? There is enough equity to refinance (I got in at 50% loan to value), but I don’t know if that’s allowed. I don’t think flipping it is allowed. I would ask the bank to change it to an investor loan, but if they don’t (or if I don’t have the money required), I could be in big trouble. I’m not the type to break laws and I’m really trying to avoid this without moving into the property. Thanks!


It really sounds like you should have thought about this before you closed on the house. You may not have known about the neighbors at the time, but the house needed work when you saw it and decided to buy. You got favorable loan terms in the form of a lower interest rate, likely a longer amortization, and less money down. The bank extends these favorable terms because there is usually less risk on a loan for a home you’re living in vice an investment property. We investors have rules to follow regarding things like mortgage fraud or waiting for the owner occupant period to end before investors can bid on HUD homes. You’ll make a bad name for yourself if you try to circumvent the system. So can you get away with this? Maybe. But it’s not the right thing to do by you signing papers that you’ll do something and then backing out.

I’m still looking to see if anyone has any experience with this. What are my options? Talk to the lender to see if they’ll change the loan to investment property? Pay it off? Refinance? Need to know my options.

Who are you dealing with? Are you using a mortgage broker? Are you dealing with a bank? Where did you find the money?

Thanks for the reply. I’m dealing with a conventional bank and a regular owner occupied loan. I’m thinking maybe if I ask them, they’ll let me pay 25% toward the principle (such as you do with an investment loan) and then let me rent it out. But I don’t want to ask them right off the bat because then they could say, “No, you cannot. You’re in trouble of even thinking of doing such a thing.” I’m calling around looking for lawyers who have dealt with this but I can’t find anyone.

There are 2 kinds of professionals. There are retail professionals and what I call investment grade professional. Retail professionals are just like it sounds. They do mortgage after mortgage to natural buyers. A natural buyer is a family that wants to buy a home for them to live in. They may do a few vacation/weekend homes also and that is how they get multi-property experience. But there is also what I call investment grade professionals. These are mortgage brokers, realtors, insurance brokers, and lawyers etc that deal with investors a lot. These guys know how to get a deal done. They will make sure you are in the correct financing vehicle from day one. If you are dealing with a traditional bank you are most likely dealing with a retail professional. I always suggest you use an investment grade professional. Even when I bought my personnel residence I used an investment grade mortgage broker. I did that because he didn’t freak out when he saw 18 mortgages on my loan application. The first thing a retail mortgage person will do is say that my debt to income ratio is out of limits and I can’t do it or the rates would be out of sight. My broker without missing a beat folded I the rental income. You should not have to work through this problem with a mortgage he should have you in the correct vehicle from the beginning.

What I would do is tell the mortgage guy what I want to do with the house. He will be able to switch you to an acceptable product. If you only have 1 or 2 houses he should be able to handle that. If the comps on the house gives you a favorable value verses the purchase price he may be able to give you a deal better than 20% down. But tell him and tell him now. The sooner the better.

Thanks for the reply and advice, Bluemoon. Even if I get married and have a child and buy a primary residence in the future, after this, I’m not going to get an owner-occupied loan and definitely not going through a bank!

So, it appears this problems is unanswerable. Here are the steps I’ve taken to learn how I’m able to move out of a house before the initial one year is up.

  1. I contacted my own lawyer who didn’t get back to me. I contacted another who told me on the phone that I can’t move out. Number three took a retainer fee and called up all his buddies at the real estate offices, mortgage offices, and banks. He after well over a month was unable to come up with an answer.
  2. I got up the nerve to call the guy who originated the loan for me. He understood (nice guy) but told me to call the company that services the mortgage.
  3. I called mortgage services and they told me I need to call FHA.
  4. I called FHA and they transferred me back and forth between branches until finally they told me to call a mortgage councillor. They gave me the numbers.
  5. I called two mortgage councillors who said I should call FHA, my bank, or an attorney. Since I’ve done all those things, I’ve now come full circle.

I talked to a real estate guru who’s done 100s of houses. He told me that since this is my first and only house I should be safe to just rent. Then he said, “You’re a good person, right? You changed your mind this time…made a mistake, but next time you won’t do this, right?” So, I guess his advice (and the lawyer’s as well, actually), will be that that I follow. Rent it out until the year is up then sell it on a land contract.

It’s kind of amazing of the dozen people I talked to today, and the numerous sites I’ve read online, no one has an answer for this. I’d be willing to pay penalty fees, refinance, etc. in order to make this right, but no one knows what to do. I’m assuming that people do this all the time and lie about it to get a better interest rate for rentals. I don’t want to be that person. I’m going to call the loan guy up again and also the lawyer.

If anyone else reads this, who wants to go about things honestly, this is the advice I can give you. If there’s a smidgin of doubt that you’ll be living there a year, don’t get an owner-occupied loan. If you’ve had a change of heart after getting the loan, let me know what you come up with because the people I’ve contacted above were unable to help. Best of luck to everyone!