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I know that most banks will require 20%/25% down on a conventional loan for an investment property. The requirement is much lower - 5% - for a home I intend to use as my primary residence. If something legitimate happens that means I cannot live there anymore (illness, tragedy, loss of job, etc...) I am able to then rent out this property. But what if I do this intentionally? Purchase with 'intent' to live in it as a primary residence and then just make up an excuse to turn it into a rental property? Clearly, this is mortgage fraud. But how would anyone, like the bank who has likely packaged my mortgage and sold it to someone else, know that this was my plan all along and hit me with mortgage fraud?
To be clear, I am not trying to do this. It just seems so simple and hard to detect/prove that I am struggling to understand why this isn't done all the time? I feel like I must be missing part of the equation as mere PMI doesn't seem a sufficient deterrent to prevent this from being rampant in real estate.

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  • This may be better suited to LawSE (but check their guidelines first), as it's going to be about the small-print of the lender's terms and conditions, and the "burden of proof" required in any potential court-case. E.g., if the Ts&Cs allow them to take action "where we suspect fraudulent statements / intentions" they may be able to impose sanctions without a court-case (accepting that such a clause may be deemed unfair). [cont]
    – TripeHound
    Oct 9 '20 at 11:25
  • [cont] If it goes to court, a criminal case (at least in the UK) requires proof "beyond reasonable doubt", and a single instance of doing this may not be enough. However, (again in the UK), I believe a civil case only requires "on the balance of probability" so a single instance may be sufficient for them to win. As I said: probably more a question for lawyers.
    – TripeHound
    Oct 9 '20 at 11:26
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Penalties for occupancy fraud can be severe.

Yes, in any occupancy fraud case, there will be an element of intent - did you knowingly defraud the bank by misrepresenting the intended occupancy status, or was this a genuine change of plans that could not have been predicted? If you come up with a very good fraud scheme, the bank may have a hard time proving intent. But if they can prove occupancy fraud, penalties could include having the entire loan called due immediately, foreclosure if you can't pay, or even prison time. If you buy a home and tell the bank it's your primary residence but never use it as a mailing address and never appear as a resident in the tax records, you can probably expect some scrutiny from the bank.

You might be able to commit occupancy fraud, get away with it, and save yourself a few tens of thousands of dollars over the course of decades. Or, you might commit occupancy fraud and get caught, bankrupting yourself and going to prison as a result. For most people, the risks outweigh the benefits.

One could ask this question about why most people don't commit any kind of fraud or even any crime at all, for that matter. The expected benefit of the crime doesn't outweigh the potential downsides, whether that is an internal "cost" (remorse, guilt, stress about being caught) or external one (bankruptcy, foreclosure, prison). Even a low probability of severe consequences is enough to deter most people.

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A long time ago I had a mortgage on a condo, but after a few years I wanted to sell it a move to a bigger property. The market was bad so I rented the condo to a tenant. I obtained a mortgage on my new place and moved in. A few years later the mortgage on the condo was sold. A few months later is was sold again. A few months later the newest mortgage company realized I didn't live in the condo, so they sent the mortgage back to the previous company, who did the same thing. So now I was back with the original mortgage company.

I did nothing wrong. I didn't try to hide anything. I had the original mortgage for more than 4 years before I rented the condo to the tenant. The problem was that the newer mortgage company didn't want to own mortgages on rental properties, and they wanted to send back ones they didn't want.

How did they know? The tax information at the county assessors office showed that I owned it but didn't live there. My mailing address on the mortgage file at the lender showed I didn't live there. The record at the condo association showed I didn't live there. A check of my credit file would have showed multiple mortgages, one of which was on a property address that match my mailing address.

This was back in the early 1990's. Today with all the electronic files, it would be even easier to double check this information.

If this happens in the months after you get the mortgage, they will investigate. They may ask for proof that you moved in. They may want to know when you advertised the place for rent. Check the loan paperwork to see if there is a minimum amount of time you must occupy the place.

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  • Did something happen in consequence to this?
    – glglgl
    Oct 9 '20 at 10:50
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    I don't think the question is "how can they tell I don't live there", but "how can they tell I never actually intended to live there".
    – glibdud
    Oct 9 '20 at 11:50
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    @glibdud Intent probably doesn't matter. If the terms of the mortgage state that you need to use the property as your primary residence, and you aren't, then you are in breach of contract. Why probably doesn't matter; it's your responsibility to refinance with a mortgage without such a restriction.
    – chepner
    Oct 9 '20 at 13:21
  • @chepner Agreed, just pointing out that the original answer didn't quite match the question as it was asked. It's been at least somewhat addressed with the added last paragraph.
    – glibdud
    Oct 9 '20 at 13:26
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To add to mhoran's answer - The agreement you signed to get the mortgage shows your obligation. It's typical to see that the "owner occupied" requirement is for a one year term. There are those who buy a house in need of repairs, move in, renovate every weekend, and after a year, buy a new place to do the same and rent out the prior one.

The key is to read the fine print, and ask the right questions.

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