QA Trends: A Discussion on Primary Residence Conversions

In recent years, the mortgage industry has seen a rise in occupancy misrepresentation. It can be difficult to identify this type of misrepresentation during the origination process. However, with the increasing frequency, it’s important for all industry participants to be aware of common red flags and steps that can be taken to help decrease the likelihood of salability issues.

That’s why we’re diving into primary residence conversions. It’s one loan scenario where occupancy misrepresentation can lurk. Our aim is to help you understand those red flags and provide some resources for further exploration. For more insight on other recent QA findings, you can always check out our MI Decision Tips Sheet to stay up to date on Enact’s QA trends.

Get to Know Recent QA Trends like Primary Residence Conversions

In the current mortgage environment, it’s critical that every credit worthy application transitions to a closed and salable loan. Team members should be knowledgeable about guidelines but also aware of the red flags that can manifest into repurchase demands, particularly those that are prevalent. A 2023 Corelogic Mortgage Fraud report cited occupancy misrepresentation as having increased 3 fold since 2020 and a trend to watch. And there are indications that the GSEs are focusing in on occupancy misrepresentation as evidenced by recent DOJ charges against a high volume loan officer.

Let’s explore a primary residence conversion scenario. A borrower might attempt to circumvent the higher borrowing costs and more restrictive guidelines of an investment purchase by representing it as a primary residence. They might also represent that their prior primary residence mortgage payment will be offset by a lease. This would result in two misrepresentations and could create two opportunities for repurchase action from the GSEs.

How you can Help Avoid Occupancy Misrepresentation / Primary Residence Conversion Issues

We understand that you can’t control a borrower’s actions after closing. But the best thing you can do to help you and your team is identify and address red flags that exist during the manufacturing process to avoid investor questions and prevent potential losses later.

This might add time to the underwriting process but will potentially save on repurchase demands after closing. Prevention is key!

Learn Common Red Flags to Curb Primary Residence Conversion Issues

Even if you’re familiar with some red flags, we’ve got you covered with a breakdown of common ones related to occupancy misrepresentation, like primary residence conversions!

To help you get to know some top red flags, see the following information from Fannie Mae:

  • Purchase Transactions
    • Real estate listed on application, yet applicant is a renter
    • Applicant intends to lease current residence
    • Significant or unrealistic commute distance
    • Applicant is downgrading from a larger or more expensive house
    • Sales contract is subject to an existing lease
    • Occupancy affidavits reflect applicant does not intend to occupy
    • New homeowner’s insurance is a rental policy (declarations page)

Additionally, some other suggestions include:

  • If a lease is presented on the property being converted to a rental conduct a web search to ensure the property isn’t listed for sale or still listed for rent
  • Evaluate the names on the lease; if the tenants appear to be relatives, ask for an explanation

For a full list of common red flags, access a helpful list from Fannie Mae here. Don’t just read it once, use this sheet as a printout, bookmark it, and keep it handy. The best thing you can do as a lender is to ask questions and document everything you can. Diligence and covering your bases are vital to misrepresentation prevention!

Want to get more insight into how you implement better practices for your origination submissions? Check out our more in-depth quarterly MI Decision Tips Sheet to discover the most frequently made Agency and Enact MI decision errors and ways to avoid them. Don’t forget to also download and use our QA Tips Sheet to reference as you’re underwriting your loans. Keep these resources handy too – help future you so you don’t have to keep everything in your memory.

More Ways We Can Help

Learn more about occupancy and property conversion misrepresentation from our own Sheila Klostermann, Director of Quality Assurance at Enact. She and one of our Enact Account Managers, Dave Showalter, dive into this topic, what to be mindful of, and how to help prevent it when you encounter it. Hear from them in the video below!

Sheila Klostermann video 4/5/24

Sheila Klostermann + Dave Showalter Interview April 2024

Be sure to make the most of your MI experience, too. Please explore our many underwriting resources and underwriting tips for more information. Because going the extra mile comes easy for us, we also offer a comprehensive suite of training resources to help boost your industry experience.

Misrepresentation comes in many forms and can be preventable with the right tools and information at your fingertips! For more insight on how to help fight mortgage misrepresentation, refer to guides and training materials from Freddie Mac and Fannie Mae.


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