Duplex Occupancy Claim With a Leaseback to Seller's Relatives
A borrower wants to buy a $520,000 duplex with 5% down using a conventional primary-residence loan. She tells the loan originator she will live in one unit, but she also gives the real estate agent a signed lease showing both units rented to the seller's relatives for 18 months after closing. The borrower currently owns a home 15 miles away and says she will keep it and rent it out. The real estate agent tells the loan originator to 'just put primary residence' because investment-property pricing is higher and the down payment would be 15%. The borrower says she will 'eventually' move into the duplex after the lease ends. The loan originator has not yet ordered the appraisal or submitted the file to underwriting. The borrower is pressuring for a pre-approval letter today.
1. Identify the occupancy red flags and explain why this is not merely a paperwork issue.
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The red flags are the 18-month lease of both units to the seller's relatives, the borrower's current home 15 miles away that she intends to keep, and her statement that she will move in only 'eventually.' A primary-residence loan requires a genuine intent to occupy within 60 days and to make the property the borrower's principal residence. If both units are leased for 18 months, the borrower cannot occupy one unit as required. Calling it primary residence to obtain better pricing and a lower down payment is occupancy misrepresentation, not a labeling problem. It affects pricing, down payment, eligibility, and investor delivery. The loan originator should treat the inconsistency as a material red flag and resolve it before issuing any pre-approval letter that labels the loan as primary residence.
2. What should the loan originator do before submitting the loan, and what should happen if the borrower insists on primary-residence labeling?
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The loan originator should ask the borrower to clarify her actual intent in writing, obtain the lease, and explain the difference between primary-residence and investment-property requirements. If the borrower truly will rent both units for 18 months, the loan should be structured as an investment property with the applicable down payment, pricing, and reserves. The loan originator should not order an appraisal or submit an application that describes the property as a primary residence when the file shows otherwise. If the borrower insists on the primary-residence label despite the lease, the loan originator should decline to submit the false occupancy and escalate to compliance. The real estate agent's instruction is not a defense. A pre-approval letter should not be issued until occupancy is resolved.
3. What disclosures, documentation, and internal reporting steps are appropriate?
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Document the borrower's stated occupancy intent, the lease, the current-home status, and the loan originator's explanation of the different requirements. Provide the appropriate occupancy-related disclosures for the product selected. If the loan is investment property, disclose the investment-property terms and any higher pricing. If the borrower will occupy, document the timing and explain that renting both units for 18 months is inconsistent. Internally, the loan originator should report the attempted misrepresentation through the lender's suspicious-activity or compliance channel and retain the real estate agent's instruction. Do not alter the lease or omit it from the file. Accurate documentation protects the loan originator and gives underwriting the facts needed to make a defensible decision.