What it is:
Occupancy fraud occurs when a mortgage borrower lies to a bank about his or her intention to occupy the home that he or she is purchasing with the mortgage.
How it works (Example):
For example, let's say John lives in Denver. He wants to buy a second home in Houston. He applies for a mortgage with a lender in Houston and tells the lender that he intends to live in the home. In fact, however, John intends to stay in Denver and rent out the Houston home, thereby making it an investment property. John has committed occupancy fraud.
Why it Matters:
The most common type of mortgage fraud, occupancy fraud generally occurs because borrowers can usually get lower mortgage rates on loans involving owner-occupied homes. Mortgages for investment properties are typically more expensive because the default rate on them is generally higher.
It is important to note that making false or misleading statements on a mortgage application is a federal crime that comes with considerable penalties, including jail time and a decimated credit rating. Additionally, if a lender discovers occupancy fraud, it can seize the property and call the loan, making it due and payable immediately.