Lenders Check For Occupancy On Many Of Their Loans

Category: Finance, Mortgages.

It happens every day of the week. The reason?

A borrower is told by their mortgage officer that the interest rate for their new mortgage will be higher than usual. The borrower is seeking financing for an investment, property, or rental. The loan officer explains that an investment property represents a higher degree of risk for a lender. The increase in rate seems significant so the borrower inquires about it. Then, what happens all too often, unscrupulous loan officers advise their clients to simply state that the home will be used as a second residence. This is a very big mistake for two reasons.

Second homes typically carry the same rate of interest as a primary residence. The first reason is that this misrepresentation is a crime! I understand that the making of false certifications or declarations is a crime under section 1014 of Title 18 of the United States Code. Here is the exact wording that a borrower is asked to sign at the closing: I have read and understand this Statement of Applicant. You may not see this wording with your initial application but it will be there in the closing package. Few people want to break the law. Most closings contain a form specifically addressing occupancy with the above wording directly below the statement.

But adding the additional cost to words like" Oh, people do this all the time" from the loan officer, many people opt to mislead the lender. But borrowers can get cauhght. Of course the loan officer is also breaking the law by advising their client to do this, but very few ever get caught. Lenders check for occupancy on many of their loans. It s actually pretty simple to catch these law breakers but because of the volume of loans that lenders provide, few people are ever convicted of this crime. They check phone and tax records.

And that is why so many people" take the chance" . Fannie Mae and Freddie Mac are two government- sponsored agencies that purchase a large majority of the mortgages loaned in this country. But what is really puzzling about all this, is for how little people are willing to break the law. The agencies have a set of rules. or" guidelines" . The agencies take no issue with purchasing loans secured by investment properties other than they require a slightly higher fee, or interest rate. If a loan falls within those guidelines, either entity will purchase the loan.

How much higher? With a 10% down payment, there is an add- on of 5 points- each" point" represents 1% of the amount being borrowed. That depends on how much is being borrowed. A$ 200, 000 loan amount will cost a borrower$ 5, 000 in order to get the very same rate they would get for a primary residence. But these add- ons DO NOT have to be paid in upfront cash. A 20% down payment would have an add- on of 2 points and down payments of 25% or more would have an additional 5% . A borrower can elect to accept a higher interest rate rather than pay the extra fee.

The longer they have the mortgage, the more beneficial the rate" buy- down" becomes. When paying points, borrowers are" buying down" the interest rate. In a typically buy- down, one point( 1% of the loan amount) will" buy down" the interest rate approximately 1/ 4 of 1% . So a total of 5 points will be an approximate increase of 5/ 8% (625% ). 2 points will be about 1/ 2% increase and 5 points will be around 3/ 8% (375% ). If 1 point= 1/ 4% , then, 1/ 2 point= 1/ 8% . Going back to the above example of a$ 200, at current interest, 000 mortgage rates, an increase of 5/ 8% adds$ 82 to the payment.

I hope you feel like me and not even think twice. A 1/ 2% increase is an additional$ 66 and 3/ 8% would add$ 4Is it worth those kinds of numbers to break the law? Another part of this equation is that it becomes easier to qualify for an investment property because lenders will often use a portion of the projected rental income and add that to the borrowers regular income. So follow Spike Lee s advice and" Do the right thing! "