Mortgage Fraud? Or Creative financing?

Question

I am thinking about purchasing a multifamily investment in Rochester, NY using an FHA loan so I can take advantage of the 3.5% down [possibly the 203k if it needs some improvements]

I would be doing this and living there [truly as my primary residence] and managing the place... until I finish repairing it up, which might only be a few months. Is this illegal? Or are there minimums you must live somewhere if you take an FHA loan out?

I'd love to stay out of jail. Thank you all!

Brian R. · Answer

@James Wise Thanks for replying do you know if I need to physically be there for the whole year for it to be on the "up and up"? I am thinking about doing some extensive traveling come the end of this summer and might be away for 4-5 months. Would that time, still count for my 12 months to make it all legitimate?

Bill Gulley Your answer makes perfect sense to me. My only other question, which I posed to James above, is do all 12 of those months have to include me physically in the property? I ask because think summer I am planning to be out of the country for a few months and would love it if that time could go towards my year in the property.

Brian R. · Answer

Thank you all for your replies, very helpful!

@Mathew Wray, I totally agree wanting to start of this whole thing on the right foot, I'm 23 years old right now and not looking to knock myself out of the game before I even get started.

I have heard that Owner Occupied means a MINIMUM of 50% of your time is spent there. Would you all say that if I didn't rent out 1 unit [my unit] for a year and spent six months in it and lived elsewhere for the other 6 months [keeping it vacant because it's my primary residence] I would be okay?

@Duncan Taylor I have run the numbers, and conservitably too [15% vacancy, 12% MGMT, 30yr fixed mortgage @6%, utilities like sewer, water, and trash and money for a reserve fund, and operating expenses.] The numbers work it's just a matter of financing.

Bill Gulley By multifamily I am specifically looking at duplexes. Do you know with the 203k if that money could be used to buy materials AND pay someone else to do the repairs for me? Or is it just for materials?

Account Closed · Answer

IMO, you can have a primary residence and travel or work away from home or be in the military large chunks of time.  It's not the travel that's the issue but rather if you are planning on having other primary residences.  Will your voter registration, mailing address, driver's license registration and tax return be at this new property for a year?  Will your unit be available for your use only, or would you be renting it out while it's supposedly your primary residence?

I agree that there is probably not much threat of a look back, but loan app crimes are federal crimes.  Why bother.

Dave Savage · Answer

If you choose to travel and do not move mailing addresses it should not impact the OO status.  If the numbers work so your mortgage is paid while you are travelling it makes a lot of sense to take this approach IMHO.  Just make sure you have a PM lined up to take care of the place while you are gone so your tenants have someone to call that is reliable and local.

This is a great way to get into a property cheap for a long term hold.  Follow the 12 month rule and then move into your next MFH and you can build a good portfolio at a young age if you buy right and keep a healthy emergency fund.

Bill Gulley · Answer

I agree with others you should pass on using OO if that's not your intention.

Residency means it is your primary home, doesn't mean you can't travel or that you must have 8,760 hours sitting in the home. Your tax home, driver's license, mailing address will show residency. :)

Brian R. · Answer

@Joel Owens Thank you, that is prudent advice and worth as much as numbers. I will adopt your rule as my own too, very valuable!

@James Wise I am definitely not looking to break the law. FYI, my game plan is buying and holding, no flipping for me and minimal repairs is important too. I really want to set myself up for success and have my first investment be a "win". I think that is particularly important being my first investment of hopefully many. If my first deal goes bad, I could see that being a challenge to recover from. The name of my game is Conservative. I might need to forget financing and pay all cash for my first deal 30k + 3k [closing] since financing might be tough. I have cash but no income [I'm fresh out of school with an hourly job but a about 30k saved] You've offered me some worthwhile advice on this FHA matter, if you have any other insight, I welcome it!

Joel Owens · Answer

Brian my simple rule is I won't think of doing things that might keep me up at night.

I like laying down every night and getting a good nights rest with a clear conscience. Will HUD catch everyone that violates the OO policy?? Of course they will not but I wouldn't want to be looking over my shoulder my whole life waiting for boulder to run me over. Many investors ask questions and when it is not clear as night and day think that is the green light to do it. That is not the case. There is smart investing taking legal risks and then there is riding close to flame and getting burned.

James Wise · Answer

additional thought. I don't think buying a home that you have too carry for 12 months. 5 of which you won't be living in it and at least 1 it will be under rehab just to flip at the end will be your most profitable option. There are many other avenues you can take that will be more profitable and like I said before do not come with the additional risk of breaking the law.

James Wise · Answer

The owner occupied certification you have to sign when buying a HUD home asks you if you intend this to be your primary residence. This is so owner occupents do not have to compete with investors. Lying on this form can include jail time and up to 250k fine. Based on what you have stated I would say it's pretty clear it is not your intention to be an owner occupant in this home and would not mess with it. Money can be made without the risk so why take it?

Bill Gulley · Answer

Yes, you need to occupy the property for 12 months.

The reason lender's can't go beyond 12 months goes to the lender's ability to encumber the owner's rights under the security agreement as to purchase money loans. To hold an owner to longer periods the loan must be offset by other benefits as consideration to the borrower. Some specialty loans, like those arranged for specially qualified borrowers with special features may have longer occupancy requirements. A low income borrower that obtains a municipal loan or from a non-profit for modifications for ADA access or a sewer line, where debt may be forgiven over time as that gives the lender the ability to require a longer occupancy requirement in consideration of the unique terms.

FYI incase someone thinks they can make a standard type loan and require an owner to live there forever, that restrains owner's rights in title, the ability of the full use of the property. HUD won't go there neither would secondary market loans in purchase money transactions, neither should seller financed deals. :)