It’s the Law: Reveal Rental Intentions

The California Assn. of Mortgage Brokers is compelled to address “Refinancing Home Before Converting Into Rental” (by Robert J. Bruss, Jan. 28), which advises readers: “It’s easier to refinance an owner-occupied house than a rental property. You will get the best interest rate and loan terms as an owner-occupant. Don’t tell the mortgage lender you are thinking about renting the house to tenants because your mortgage might not get approved, or it may have a higher interest rate.” This advice is not only unethical, but also illegal.

You may not want to tell the mortgage broker about your plans, but as the owner of the property, you are ultimately liable. And if a mortgage broker knows what you are doing, he may be liable as well.

Please note the Declarations section (VIII) and the Acknowledgment section (IX) on the standard loan application, FNMA Form 1003, which all mortgage applicants complete. In the Declarations section, several questions must be answered either “yes” or “no” by both borrowers. Question L directly asks of the intent to occupy the subject property as the primary residence. Section IX, the borrower’s signature(s), certifies that “any intentional or negligent misrepresentation(s) of the information contained in this application may result in civil liability and/or criminal penalties, including, but not limited to, fine or imprisonment or both under the provisions of Title 18, United States Code, Section 1001, et seq.” So, not only is fraud committed by lying about plans for its use, the risk of perjury occurs when the application is signed.

There are valid reasons for a law that protects the buyer and lender. Lenders base their pricing (interest rate, fees) on risk. Risk is determined by past performance. Non-owner occupied properties (rentals) have a much higher default ratio than owner-occupied properties.

Think of it this way: If you own two properties and you lose your job, which mortgage payment would you make first? Most people would protect the roof over their own head. For the same reason, lenders will require more stringent requirements for rental property borrowers. Typically, additional reserves, sufficient income and a good credit history are mandatory when a lender evaluates a request for this type of loan.

These fraudulent practices hurt all of us. It is part of the mission of the California Assn. of Mortgage Brokers to educate and protect home buyers with respect to real estate loans. Part of that education is bringing to light those areas that are common sources of misinformation. Misrepresenting owner-occupancy is one of the most common sources of mortgage fraud.

J.T. MARCELL

President, California Assn.

of Mortgage Brokers