Cutting Corners With Income Property Financing

rental-mortgage-fraud “There’s going to be a dramatic increase in mortgage fraud,” Don Campbell told the Financial Post last week.

Campbell runs the Real Estate Investing Network and says the fraud will stem from CMHC’s new rental financing rules.

The new rules, which take effect April 19, require borrowers to put down 20% when applying for insured financing on rental properties (up from 5% today).

CMHC is also changing its debt service calculations to make it harder to rely on rent as a source of income for qualification purposes.

Campbell thinks people will therefore try to skirt the rules in increasing numbers. They will do so, for example, by stating that they intend to live in a property as their principle residence, when they really plan to rent it out.

People also try to call rental properties “second homes.” We know because we’ve lost a few deals to branch reps and brokers who facilitate these kinds of deals.

Mortgage broker, Peter Kinch, tells the Post: “I’m shocked by the number of bankers who will say, ‘Let’s call this owner-occupied so it’ll be easier and we won’t have to go through the hassle.’”

Regardless of whether you’re a broker or bank rep, misstating occupancy is a dangerous game. If you’re caught knowingly processing a fraudulent application for a customer, your reputation could be toast, your license suspended or revoked, your employment terminated, and your lender access cut off.

It’s not even close to worth it, but people don’t think they’ll be caught, so they do it.

Of course, lenders and CMHC are well aware that people try to cheat the system by not disclosing the true occupants of a property. After April 19, they will likely scrutinize multi-property applicants with even greater intensity. In some cases they may require proof that a property will be owner occupied.

As always, the best path is the right path. Fraud is fraud and the monetary “reward” for bending the rules is never worth the stress.

  1. Not only that from the perspective of a Mortgage Broker but as the person borrowing the funds. Mortgage Fraud is no joke.
    You could have your mortgage called due immediately, be investigated, and worse go bankrupt through a domino effect of debt. In Ontario and most of Canada, mortgages are recourse loans meaning “They are allowed to go after you for amounts that you owe – even after they’ve taken collateral.”
    Trying to buy property with the highest leverage is not the best method of buying investment property.

  2. well said, honesty is the best policy, I get told a lot of times by clients, that some Mortgage person is efficient because that person got them what they needed but by misrepresenting the facts. I think when any thing happens, mortgage person will probably say that client gave me this info and will be off the hook, putting client at risk.

  3. Of course there will be more fraud and it’s not just the rental income property issue – income itself will go back to the old days where paper was easy to manufacture. BFS clients will skirt around the BFS rules easily. job letters and paystubs will float around in the market so that those who are self-employed will be able to prove income.

  4. Nonsense. If a person can’t qualify for the loan under the new rental rules, how in the world would they qualify as it being a second home? My gosh these hucksters are getting desperate. Surprise me, publish this comment.

  5. Chilled,
    Hopefully we weren’t the intended target for the hucksters comment. :)
    2nd homes require only 5% down, instead of 20% for rental properties going forward. That may motivate a small number of unscrupulous people with sufficient debt servicing capability to call a rental property a 2nd home.
    In the past, we’ve also seen cases where individuals with sufficient cash flow call rentals “2nd homes” to avoid the higher insurance premium and/or get around the qualification restrictions (e.g. Beacon minimums and income guidelines) that apply to insured rental financing.

  6. Little,
    second home is for your children, sister, brother, parents, who do not qualify on their own, then you buy for them

  7. A 2nd home is a home you own that is not your primary residence and that you don’t collect rent on.
    A rental is a home you own for the purposes of using the rental income to pay the mortgage.

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