Owner-occupied loans are a better deal than investment property loans, which is one reason why many borrowers lie on their mortgage applications to get a better deal. 

On their mortgage applications, home buyers are required to indicate whether they are borrowing for a primary residence, secondary residence or an investment property. The act of misrepresenting the sort of residence a mortgage is intended for is called “occupancy fraud,” and though it can yield a good deal for consumers, quite the opposite is true for lenders tricked by the practice. Primary residences have a much lower default rate versus other home types. Loans for primary residences offer borrowers much lower down payments, as well as better interest rates, which is why many borrowers apply for them, even when they are renting rather than buying homes. 

Though occupancy fraud stubbornly high, overall fraud remains low
A single-family investment property loan could require a down payment as high as 15 percent, as opposed to 3 percent for a primary residence, John Walsh, the president of Total Mortgage Services in Milford, Conn., explained to The New York Times. Also, interest rates for the former could be as much as half-a-point higher than the latter. Because of the benefits of applying for an owner-occupied loan over an investment property loan, occupancy fraud represents the second most-popular sort after misrepresentation of debt liabilities. 

The most recent CoreLogic report on mortgage fraud found that the new qualified mortgage regulations under Dodd-Frank may have helped reduce the presence of some types of mortgage fraud. Others though, such as occupancy fraud, have continued to occur at relatively high rates. Though misrepresenting the sort of residence a loan is for remains a common type of fraud, the practice of mortgage application fraud in general is fairly low. During the second quarter of 2014, a total of 11,100 mortgage applications - or 0.69 percent of all home loan applications - contained some form of fraud. 

Occupancy fraud becoming easier to find
While occupancy fraud is still occurring at a relatively high rate, lenders are also getting better at rooting it out among the more legitimate applications. 

“It has definitely decreased from the time that subprime loans were available and lenders were very, very lax in their lending standards,” Curtis Novy, a private California mortgage analyst whose specialty is uncovering fraud, told Scotsman Guide. “A lot of these lenders didn’t pay a lot of attention to the occupancy, didn’t ask a whole lot of questions. Currently, it is more difficult to obtain a loan. Lenders [and] mortgage underwriters will definitely look at the occupancy for red flags.”

With increased lender scrutiny – such as looking for red flags like unusually-high commute time or separate outstanding mortgage applications – and improved technology, lenders can do a better job at uncovering mortgage fraud than in the past.