An affidavit of occupancy is a simple document that often gets lost in the shuffle of real estate closings. This is unfortunate. Individuals who don't fully understand the implications of affidavits of occupancy may find themselves hit with financial and even criminal penalties at a later date. Since these documents have special import for small-time or independent real estate investors, they demand attention from anyone who plans on purchasing residential real estate for the purposes of earning rental income.
What Is an Affidavit of Occupancy?
Since affidavits of occupancy are not heavily regulated or governed by formal, industry-wide guidelines, they're often originated in-house by mortgage lenders or other real estate professionals. As such, their structure can vary somewhat. However, every affidavit of occupancy has a few basic characteristics that seasoned home-buyers or real estate investors will recognize.
These documents generally appear as addenda to mortgage settlement agreements. It's important to note that they're included in addition to the standard occupancy-verification questions that appear in most mortgage agreements. Unlike line-item questions that ask for verification of the property's status as a primary residence, affidavits of occupancy appear as separate documents that must be individually notarized. In effect, they require their signers to swear under oath that they'll live in the property in question on a full-time basis. Since they're formal contracts that must be notarized, affidavits of occupancy must be honored.
Benefits and Importance
These documents' most visible benefits accrue to the mortgage originators and broker organizations that often require their use. They serve as an extra layer of protection against mortgage fraud and provide lenders with a clear chain of evidence that can be used to expose and prosecute such fraud. Whereas a homeowner might be able to make a plausible if unconvincing argument that he or she misunderstood the intent of the "occupancy question" that's often buried within the structure of a mortgage settlement document, he or she has little chance of avoiding penalties for breaking an affidavit of occupancy.
In a broader sense, affidavits of occupancy lend some order to the housing market. By holding small-time real estate investors accountable for their decisions, these documents reduce the risk that mortgage lenders face and may reduce the incidence of non-performing loans on rental properties.
Strategies for Avoidance
Home-buyers have plenty of incentives to be dishonest or misleading during the mortgage closing process. Since owner-occupied properties present less mortgage risk than rental properties, residential owner-occupants generally enjoy mortgage rate reductions of .5 percent or more relative to their landlord peers. Over the course of a 30-year mortgage, this can translate to thousands of dollars in interest savings.
As such, small-time landlords often sign affidavits of occupancy without ever intending to live in the property in question. Although this sounds quite brazen, it's surprisingly easy for these illegal landlords to avoid detection. If they avoid putting up parking signs, applying for rental licenses, or renting to loud or "out-of-character" tenants, it might take years for the scheme to be uncovered. In larger cities, housing authorities fight ongoing battles with small-time illegal landlords. Of course, the criminal penalties for running an illegal rental operation are stiff.
Penalties for Non-Adherence
It's important to note that many property owners who make untruthful affidavit of occupancy statements aren't illegal landlords. However, individuals who "stretch the truth" by moving out of supposedly owner-occupied properties soon after closing or making other questionable moves may still face stiff criminal and civil penalties for their actions. Since affidavits of occupancy function as sworn statements for legal purposes, individuals who renege on these agreements are perpetrators of mortgage fraud. Mortgage fraud penalties include hefty fines and claw-backs. In serious cases that feature widespread or large-scale patterns of deception, jail time is a distinct possibility.
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