Mortgage Fraud or Legal Finesse?

Question

Hello! I am going to give a quick run-down of my situation to see if what I want to do would be considered mortgage fraud or finessing the system

I bought property 1 in 2019 and lived in it for 1.5yrs. I fully rented it, qualified for another primary residence loan and bought a second property (new primary residence) in Feb. 2021 and house-hacked.

As we all know, residential properties have appreciated significantly. I knew that I had equity in property 1, but, now that it was considered an investment property and cash-out refinances were capped at 70% LTV, it wasn't quite worth it for me to refinance property 1 as an investment property. Unfortunately, in May 2021, my dog was attacked by my tenant's dogs at property 2, and my 1st property happened to be vacant at the time, so I was able to fully rent out property 2, move back to property 1 and cash-out refinance property 1 at 80% LTV as my primary residence. A dog attack was a legitimate excuse for moving primary residences so quickly in the eyes of the bank, as it was a safety issue.

With the money I pulled out from property 1, I am looking to buy another property and currently have one in my sights. This is the current situation:

I will purchase property 3 with 15% down as it will be an investment property. I will be doing significant rehabs to it (estimated time to complete 2-3 months), so, in order to save some cost on labor, expedite the process, and generate cash flow, I plan on moving in to this hypothetical property 3 and fully renting out property 1 (although I just refinanced it as my primary residence on 7/21). After I rehab property 3, I will refinance to recoup some of my out-of-pocket costs. Since I will be living in it, can I refinance it as a primary residence 2-3 months after financing it as an investment property and 5-6 months after refinancing property 1 as my primary residence? I know the general rule of thumb for banks is to lend on a primary residence 1 year prior to the last loan, unless there is a legitimate excuse like moving to a different city/state, becoming pregnant, etc.

All of these are legitimate moves that I've made, albeit very quick. I'm am trying to hustle!

In short, would refinancing property 3 as a primary residence be an option for me (where I can pull out 80% of equity and take advantage of lower rates vs 70% of equity as an investment property and higher mortgage rates)?

Here's a timeline of my financing:

8/19 Purchased Property 1 as primary residence

11/20 Fully rented property 1

2/21 Purchased Property 2 as a primary residence

5/21 Dog was attacked by tenants dogs at property 2, moved back to vacant property 1

7/21 Refinanced property 1 as a primary residence

Theoretical Timeline:

9/21 Close on property 3 as an investment property

12/21 Refinance property 3 as primary residence

I hope this all makes sense. Just trying to cover my ass and make sure that this would be a legitimate move and not something that looks fishy. I will actually be living in property 3, after all, just less than 1 year after my last primary residence loan. Worst comes to worst, I refinance property 3 after rehabbing as an investment property and pay the higher rate/get less cash out.

Thanks in advance for taking the time to read and answer! Any and all advice is appreciated, even hypothetical situations I have not discussed (like potentially HELOC property 3 post renos?)

Michael Plante · Answer

For me it’s easy

If I ask the mortgage broker if I can do that and it is recorded it is legal

Theresa Harris · Answer

Talk to your broker, but refinancing property 1 in July as your primary residence and then buying property 3 as a primary 2 months later is questionable.

Cooper Reece · Answer

It will likely raise red flags among your lender. Also, you can’t cash out refi based on the increased value for 6 months. In other words, if you buy property 3 for $200k and put some work into it and 3 months later it’s now worth $300k, the bank won’t loan on the $300k until 6 months have gone by since the purchase. The refi would still be based on the $200k purchase price. This is a “cool off” period that was implemented after 2008 on cash out refis. Otherwise, my understanding is that if you live in the property or intend to do so very soon upon securing the financing, it can be considered a “primary residence” but I’m neither an attorney nor a mortgage broker so don’t rely on my opinion... Again, numerous “primary” purchases in a short span of time might get you more attention than you’d like...

Marian Smith · Answer

@Christina Zimmerman  If you actually move into a place, get mail, etc, it would be difficult to find fault with you changing your mind prior to the one year.  I would just disclose the date of your last o/o refinance to your lender.  If they have a problem with the date try another lender.  I am not in the industry, but the intent behind the rule is probably two fold.  Taxpayers do not want to supplement investors with low down payments on property loans  nor take on the risk of an investment property loan that originated less than a year ago as an o/o...again, no equity.  But if you left equity in the properties at refinance you have mitigated much of the risk.  So I personally would disclose and not give it a second thought.  You found an opportunity and changed your mind.  Do one more and it might look like a business plan so I might feel more obliged to stay the full year.  Kind of like no capital gains when you sell after 2 years o/o.  You can repeat over and over if you don't mind the hassle of moving, perfectly legal but not exactly the intent of the law.

Max T. · Answer

@Christina Zimmerman

You should ask your lender.

But I think it will work, although you will need to wait 6 months to cash out refi on house 3.

Stephanie P. · Answer

Hey Christina

You were good right up until the last refinance.  It's not your primary residence.

Stephanie

Axel Meierhoefer · Answer

I find it interesting to contemplate your situation but it appears to me that you haven't really stated your goal very clearly. For me the main reasons to finance something as a primary residence rather than an investment property are:

1. You can normally get financing with a significantly lower down payment, something like 5% or 10% versus typically 20% for investment properties. You stated that you want to put 15% down for property 3 and then renovate it, which will cost you money to do. To me, that makes no sense. If you were truly using it as owner-occupied, you should put as little as possible down, eat the mortgage insurance, use the saved funds to renovate. When all is done and 6 months have passed, you refi keeping 20% equity in the deal or get a commercial mortgage and then rent it. As Matt and others stated, you should stay 6 months anyway and you can then refi as occupying owner and later rent. As long as you initially owner-occupied it after purchase and then rent it, you can keep it as such.

2. As an investment property you don't get exactly the same interest rates as you would as on owner-occupancy but if you compare with the same % downpayment the difference is not very large (especially on a monthly basis).

To me, I focus on generating cash flow and enjoy any equity gains from appreciation. It reads like you are also developing a passive income portfolio.

If that is actually your goal, I would not put so much focus on getting each property financed as OO first, but focus on good performance for the time when you rent it.

Matt Devincenzo · Answer

This (to me) is easy, if you didn't actually plan to stay at property 1 for 12 months because it was an 'emergency' move, then you shouldn't have taken the opportunity to refi as OO. If it was a short term situation and you only moved for an emergency, then you should have refi's as investment since you planned for it to remain short term. But you didn't you said 'I moved for an emergency' (we're good) and I intend to stay for 12 months (we're still good), but now I want to move a new primary in less than the agreed 12 months (now we're no longer good).

Christina Zimmerman · Answer

Thanks everyone for your responses! Lots of insight

Mortgage Fraud or Legal Finesse?

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