Editor’s note: Meet Bernice Ross at the upcoming Real Estate Connect conference in San Francisco, which runs from Aug. 5-7, 2009. She will be available to meet with conference attendees from 12:30 p.m. to 1:30 p.m. in the Palace Hotel’s Ralstom Room. Click here to send Bernice a message.
DEAR BERNICE: My husband and I would like to purchase an investment property in the suburbs where we grew up. We are currently renting a great loft condo downtown and love the city lifestyle. Our mortgage broker is telling us that if we do not occupy the property, we will have to pay a much higher interest rate. Can’t we tell the lender that we’re going to move into the property and then change our minds and rent the house instead? How’s the lender going to know? –Michelle B.
DEAR MICHELLE: The answer to your question is that "yes," you could defraud the lender. Plenty of people have tried doing this in the past and a large number of them have been caught. If you went through a federally chartered bank or obtained an FHA, Freddie Mac or Fannie Mae loan, you will face federal charges. This is a criminal offense.
The reason this is considered mortgage fraud is that investor loans are more likely to default. This means the lender has more risk. The higher interest rate reflects that risk. In essence, this is comparable to lying about how much you earn. My advice: Don’t even think of doing this.
In response to your question, "How’s the lender going to know?" there are a number of ways. First, are the utilities at the property in your name? Is there a phone at the new address in your name? Is the mortgage payment being sent to your current address rather than the new address? Is your mail being sent to the new address? Do you have a full owner’s insurance policy on the property where the bill is being sent to the property address? I have seen buyers make all of these changes and they were still caught.
What are the consequences? Even if the lender doesn’t press charges against you, there is a high probability that they will "call the loan." In other words, you will have to immediately payoff the entire loan balance. Because of the fraud, it’s unlikely that another lender will give you a loan. The result: a foreclosure and virtually irreparable damage to your credit.
You do have options. You could live in the property for at least one year. If you wait at least a year before you rent the property, it’s less likely to be an issue. On the other hand, since you really love your current lifestyle, perhaps the best possible solution is to find a great downtown condo. That would allow you to enjoy the lifestyle you love and you wouldn’t have to worry about misrepresenting your situation to the lender. If you decide to move to the suburbs later, loft condos often make good rentals.
When you fill out a loan application, there are numerous ways that the lender can find out whether you’re lying about your income or other circumstances. When it comes to your loan application, honesty is always the best policy. …CONTINUED
DEAR BERNICE: I read your article on disclosure. It was very clear and made good sense. The question I have is this: Does a seller have to disclose that the owner passed away in the house? Or do they have to disclose that the owner passed away, even if it was in a hospital? The relatives are selling the property. –Randy D.
DEAR RANDY: Disclosure requirements vary from state to state. Check with a local Realtor to find out what is required in your area. If someone dies of natural causes on the property, you may be required to disclose that fact. Some people simply can’t cope with the idea that someone died in the same room where either they or their children may be sleeping.
In terms of making this disclosure, usually there is a time period attached to this requirement (i.e. did the death take place in the last three years?)
The challenge is where to draw the line about when this disclosure is required. For example, if you own a 150-year-old house, how could you know how many people died at the home? In contrast, if the owner died in the hospital, there is no requirement to disclose that information to prospective buyers. Please verify the disclosure requirements for your location.
If there has been a violent death on the property, you must disclose it. Some states require the disclosure if it occurred within three years. Others may have no requirement. It’s better that the buyers find out about the death before they write an offer. That way they can make a realistic decision. Furthermore, it’s the best way to avoid a lawsuit for failure to disclose. (You can definitely count on the neighbors to inform the new owners about what transpired.)
Also, there are some fairly stringent requirements around deaths related to AIDS, which fall into a protected class that is governed by fair housing and anti-discrimination laws. Again, check with a competent real estate professional or with a real estate attorney if you have any additional concerns about this issue.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author of "Real Estate Dough: Your Recipe for Real Estate Success" and other books. You can reach her at Bernice@RealEstateCoach.com and find her on Twitter: @bross.
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