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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.