I often see press releases that define straw buyers as individuals who did not intend to reside in property that they purchased. I also receive many emails about these types of situations that conflate straw buyer fraud and occupancy fraud.
Straw buyer fraud is not differentiated by the intent to occupy. I think that the confusion arises from the fact that straw buyer fraud almost always involves occupancy fraud. But occupancy fraud is, by itself, mortgage fraud. Straw buyer fraud has additional elements and is something else entirely.
In general, a straw buyer/borrower is a person who acts as the buyer in a real estate transaction but has no intention of being financially responsible for the property. The most obvious example is where a person is paid to lend their identity and credit to a transaction. So, for instance, let’s say that I cannot qualify to buy the $500,000 house I want because I have horrible credit and, while I technically make more money each month than the payment amount, I don’t make enough that my front-end and back-end ratios will allow me to qualify for a mortgage. So, I agree to pay you $5,000 and you agree to act as the buyer of my dream home. We apply for the mortgage in your name and use your social security and credit. The application has all of your financial information on it and we don’t even bother to mention me to the lender at all. At closing, you sign the promissory note and deed of trust or mortgage and other loan documents. But, as soon as we walk out of the closing, you hand me the keys, we shake hands, and we go our own separate ways. I move into the house and place my beautiful new blue sofa in front of the fireplace. I make the payments every month. I fix the roof when it needs repair. I put a swing set in the backyard for my children. Even though you have title to the house, I was always intended to be the real owner.
There are many variations on this scenario. For instance, straw buyers are often used in real estate investment schemes. There are underwriting limits on the number of residential mortgage a single person can have at one time – and there is also generally a point where the carrying costs on properties will cause an individual to lose their ability to qualify for additional mortgages. If the scheme principals have maxed out their lending ability, they often use straw buyers so that they can extend that ability and purchase more homes. Sometimes the straw purchasers are relatives or employees – but I have seen ads on Craig’s List looking for ‘investors’ who are paid up front, lend their credit and then allegedly have no further responsibility for the property – and, of course, no right to share in any profits when the property is sold.
Other times, straw buyers are parents that act as credit partners for their children – buying the house in their own names because their offspring cannot qualify – but with no intention of having the ultimate financial responsibility for the property.
There are as many colors of sofas are there are variations on the schemes.
And, unless the intended tenant of the property is the straw buyer (which I have personally never seen), straw buyer schemes always involve occupancy fraud.
Occupancy fraud is purchasing a property and representing to the lender that you will live in the property when you have no intention of living in the property. You can lie about your intent to live in an investment property in order to get a better interest rate while still intending to own and be financially responsible for the property – you have committed occupancy fraud but not straw buyer fraud. The majority of occupancy frauds do not involve straw buyers at all. And, occupancy fraud is mortgage fraud all by itself, regardless of whether there is a straw buyer involved.