Why Would a Bank Do an Occupancy Check?
Understand why banks perform occupancy checks on properties, how they're done, and what the outcomes can be for your loan.
Primary Reasons for Occupancy Checks
Banks conduct occupancy checks primarily to manage financial risks associated with property loans by verifying the property’s stated use. Owner-occupied homes generally carry lower interest rates and down payments because they are considered less risky, and these checks ensure borrowers receive appropriate loan terms.
Another significant reason for these checks is fraud prevention. Occupancy fraud occurs when borrowers misrepresent their intention to live in a home to secure more favorable loan terms. Suspected occupancy fraud in loan applications has nearly tripled since 2020, making these checks a proactive measure to identify “straw buyers” or properties used for undeclared purposes.
Banks also use occupancy checks to assess the property’s condition and ensure it is maintained. An abandoned or disrepaired property significantly impacts its value as collateral. This monitoring is part of ongoing loan servicing and risk management, especially for delinquent loans. Compliance with specific loan types, such as FHA or VA loans, or internal bank policies may also necessitate periodic checks.
The Process of an Occupancy Check
An occupancy check typically begins when the bank’s loan servicing department or a third-party servicer initiates the request. These checks are sometimes performed automatically if a homeowner falls behind on mortgage payments. Borrowers are often not notified in advance for initial checks, but they might receive notice for follow-up or interior inspections.
The methodology for conducting these checks commonly involves drive-by inspections or visual assessments from the street. Less frequently, scheduled interior visits may occur, but the primary focus remains external observation. Personnel who perform these checks can include bank employees, third-party inspection vendors, or appraisers.
During the inspection, the individual collects observable information and documents their findings. This documentation often includes photographs of the property and a brief written report submitted to the bank.
What Banks Assess During an Occupancy Check
During an occupancy check, banks focus on observable indicators that suggest whether a property is actively inhabited. Inspectors look for signs of current occupancy, such as lights being on, mail in the mailbox, or vehicles in the driveway. Other indicators include trash cans at the curb on collection days, general activity around the property, or personal items like outdoor furniture or toys.
The condition and upkeep of the property are also closely assessed. Visible signs of neglect, disrepair, or obvious vacancy are noted, such as an overgrown yard, broken windows, or accumulated flyers. Such details can indicate potential abandonment, which impacts the property’s value as collateral.
Inspectors also look for consistency with the information provided in the original loan application. Any signs that contradict the declared use, such as commercial activity in a residential zone or evidence of multiple unrelated residents, are considered. Obvious structural issues, hazards, or signs of vandalism are assessed because these can reduce the property’s value or present a risk to the bank’s investment.
Potential Outcomes of an Occupancy Check
When an occupancy check reveals no issues, meaning the property appears occupied, well-maintained, and consistent with the loan terms, the report is filed. Typically, no immediate further action is taken.
If the check uncovers signs of vacancy, neglect, or discrepancies, the bank may initiate further steps. This could involve a deeper review, contacting the borrower, or requesting an explanation for observed conditions. They might also review utility records or tax documents to corroborate occupancy.
Findings indicating a potential violation of loan terms, such as the property not being used as a primary residence, can lead to a loan covenant review and notification of default. If the property appears abandoned or shows extreme neglect, the bank might take steps towards property preservation to protect its collateral. In rare instances, significant breaches of contract or suspected fraud may lead to more serious legal remedies, including loan acceleration or foreclosure proceedings.