Any way to get around FHA owner occupancy restrictions?

Question

I'm new around here and if you've taken notice of me over the past few days, you'll see that I tend to post some newbie questions.  This time I've been able to do a little homework and my question is a little less obtuse.  So here's the situation:

I'm a contractor overseas.  I work year-round in Saudi Arabia where everything sucks but they pay you lots of money.  My target properties are 2-4 unit rentals that I plan to buy and hold, preferably with units already leased.  To this end, I want to take advantage of an FHA, Fannie Mae or Freddie Mac low down payment loan to get started with rental properties in the 2-4 unit range.  Now as all you seasoned investors know, those loans require owner occupancy of the property as a principal residence, which is not really feasible for me because (A) I can't physically be there all the time since I'm overseas and (B) the property in question is meant to generate revenue, so even just taking one of the units off the market will cut my monthly profits down to a pittance.

So, to all of you who are wiser than me, who have plied the tricks of your trade and trod the path less straight and narrow, I ask you, is there some legal way to get around this restriction?  Obviously I'm not out to commit fraud or anything, but one example idea I had was finding someone I trust and who needs a place to stay to be my 'roommate' of sorts, effectively renting the unit while I use it as my physical address.  I'd get my mail there and have a cot or a sofabed or something so that in all respects I could technically live there whenever I come home (even if I only get a few weeks home each year).  Is that a solution to this problem, or would that constitute some kind of fraud or something?  If you guys have another more elegant solution, please enlighten me.  Or, you know, tell me I'm barking up the wrong tree or something.  I might be completely wrong and there's no way to use these loans as a contractor in my situation.

Dion DePaoli · Answer

You are barking up the wrong tree. What you are trying to do is ultimately loan fraud.

You can purchase a multi-unit property and one unit can be your actual primary residence. Your occupation being overseas does not mean you have a mandate to be on property any set number of days or time. The key is that is your primary residence here in the states when you are home no matter how brief. That would allow you to rent the 'other' units which you do not reside in. If you rent the unit you have designated as your residence then you will have violated your occupancy designation.

Investment property loans are structured with larger down payment demands and reserve requirements among other things as those are necessary to make and manage a good investment. In other words, there is purposely no low down payment loans for investment properties like there is for primary and second homes for good reason.

Playing games with this type of attempt to circumvent the guidelines and systems can have you end up with fraud charges, foreclosure or even being placed on a black list for any future loan involving government entities. (Defrauding Ginnie Mae [FHA] is generally a bad idea). It could be pretty difficult to defend yourself from a foreclosure while you are overseas and you could be liable for deficiencies.

Do things the correct and proper way. You are not smarter than the system.

Bill Gulley · Answer

Yes, actually, I don't care for your approach, how do you get around and what tricks are there, you have the wrong attitude.

Now, try being honest. You can buy an owner occupied home and work overseas if you have family live there or if you use that home as your residence, tax home and do not rent it, look at second home guidelines as well. Residency is a legal status and generally you need to "be there" more than 6 months of the year, and in the first year.

You generally need to move in within 90 days from settlement. Some exceptions can be made where people are overseas and coming back, such as military folks ending their service requirements and having qualifying income. Lenders can make loans, portfolio the loan and sell the mortgage when the loan meets qualifying standards, some lenders may do that, they may make secondary market loan terms and simply hold the note if it is an adjustable rate, they aren't holding a 30 year fixed rate do to interest rate risks.

Most loan officers probably won't be up on such exceptions, they will need to do some digging and make some calls to their wholesale underwriters. Might try a good mortgage broker, they may be willing to do the extra work involved.

It's always better to be totally honest with your lender, a good one can use their knowledge (as your tricks) to get a deal done. Problem is that they are busy, they make so much and they don't have to do that loan, so you may get the old "you can't do that".

Understand that pulling some trick with an insured institution is mortgage fraud, messing with government loans are felonies, up to $100,000 in fines and/or 10 years in a federal prison, so need to begin with the right attitude. Good luck :)

Kerry Baird · Answer

We bought three rental houses while serving overseas. We disclosed to the lender that we were not going to occupy the properties and that they were for investment purposes. There are mortgages for this purpose.  We used legal on base to do notary work, and many documents can be electronically signed. If you buy newer houses, as we did, there are not many surprises, repairs and the like.

Jean Bolger · Answer

IMO you're looking for trouble with that approach. You say you're making plenty of money, so it sounds like coming up with the larger non-owner occupied downpayment is not a insurmountable obstacle. Just do your research and buy right, you'll do fine with your investment. Leverage is a great tool for building wealth, but over leveraging can be a real problem as well. When you get back to the states you can look into using the owner occupied loan options to build your portfolio (although you may even find that they're not worth the extra trouble because of the higher costs incurred due to the required mortgage insurance)

Bill Gulley · Answer

Good to hear, thanks!

When you deal in any highly regulated part of commerce, you need to understand the rules of the game before you try to look at being creative in that business, that is true for any business. Same goes for taxation, I certainly wouldn't ask non-accountants or tax professionals for advice on how they do their tax avoidance matters. Now you know, financing is not a real estate matter it's another world and the most regulated area of commerce carrying stiff penalties. Good luck :)

Alex SImon · Answer

@Bill G. I promise I wasn't being nearly as disingenuous and false as I probably sounded.  I just didn't know if there was some commonplace maneuver that experienced RE investors used, some workaround that was still very much legal.  I was looking at it more like some of the creative moves that business owners use to maximize their tax deductions, where they're basically shifting money around from one pocket to another in a way that will stop them from having to pay too much in taxes.  But, this is some interesting reading and I'll be sure to keep from making these kinds of assumptions in the future :)

Alex SImon · Answer

Ah, thanks for giving it to me straight.  I didn't know if this was a thing that people routinely sodestepped or if it was serious business, and it turned out to be pretty serious business after all.  This is good to know, though!

This overseas work is simultaneously my greatest asset and biggest stumbling block.  Maybe in a few years when I come home for good I can use an FHA loan to finance my swinging bachelor pad.

Any way to get around FHA owner occupancy restrictions?

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