It used to be the number one form of fraud: a buyer saying they intended to occupy a property when they never did.
If you don't know why an applicant would state they intend to occupy a property when they know they are purchasing it as an investment it has everything to do with being able to qualify for the loan. Lender guidelines for owner occupied properties are much less stringent than they are for non-owner occupied properties. Risk to the lender is much higher on investment properties therefore the gauntlet to approval for an investment loan is tougher than it is for an owner occupied loan.
Owner occupied loans are easy to obtain on properties valued around $150,000 up to 100% financing even with stated income in most areas of the nation. In declining markets today many lenders are limiting investment property financing to 80% or even 70% while owner occupied loans are still allowed up to 90% or even 95%.
Until about 2003 this was a very common process but as the market loosened and more sub-prime loans were geared toward investors occupancy fraud began to decline and document fraud, appraisal fraud and stated income fraud took the lead. Now that the offerings from lenders have returned to pre-boom guidelines occupancy fraud has started to climb again.
Many people think it isn't a crime because "it doesn't hurt anyone as long as the payments are made". This is inaccurate. It hurts the lenders and their investors. It hurts the competing investors who play by the book. It hurts the lenders and their investors because they have made a loan based on the lower risk presented by an owner occupied property. Let's say the rate for a 90% non-owner loan is 9.5% while the rate for a 100% owner occupied loan is 7.5%. Immediately you can see that the lender is carrying 10% of the value in risk and they are loosing 2% in interest revenue per month.
So how does a real estate agent or loan officer identify occupancy fraud before it has a chance to manifest? While these signs are not absolute and may not be the smoking gun they are flags that need to be addressed with the lender and the borrower. As a loan officer or real estate agent you do have the fiduciary responsibility to the lender and the industry to identify and report suspicious activity.
Home buyers moving from a $350,000 home to a $200,000 home need to have a very good reason. You may as well ask up front because the lender is sure going to require a solid and acceptable explanation. That explanation better mean divorce, children all moved away, retiring, one spouse lost job or they are moving from a place where the same size and type of home have values that different.
A buyer looking for a "second home" in a non-resort area. Some buyers actually don't know the rules about a second home. Some buyers actually think a second home is an investment home. The rules vary slightly from lender to lender but generally speaking the house needs to be in a resort area at least 50 miles from the primary residence. We have actually done second homes for people who are college football nuts and have season tickets to their favorite college football team. We have also done second homes for people who work in one city and live in another when the second home was not in a resort area but they must be able to prove they actually work in the second city.
Anyone who moved into their current residence less than 12 months ago and is now shopping for a new primary residence will have a lot of questions to answer. Generally speaking people don't move every 12 months unless they are in the military, students or contract workers. Ask the questions up front so they won't stop the transaction 3 weeks into it when the compliance department at the lender discover the issue.
Use your common sense and your "sniff test" and think about it. Does it make sense for this couple driving a new Lexus to be looking at a $235,000 duplex in a shady area of town to actually live in? Is their current home listed for sale? How does the home the currently own compare to the homes they are shopping?
If you have any doubts - - ask!