That's true - and would be a great defense if it were relevant
Unfortunately, it isn't.
She can have anyone she likes live with her in the house. She can even charge them rent.
James has already said she did spend some time in the property
She also said under oath that she spent zero days there on the first year's taxes.
And "some time" isn't good enough. Let me break it down. There are three categories of occupancy when Freddie/Fannie underwrite a loan (ok... it's four... but this isn't a group home):
1 - Owner-occupied as a primary residence. These are the lowest-risk and receive the best pricing, lowest down payments, and the easiest approvals. It doesn't matter whether other people live there or not - but the owner must maintain it as their principal residence.
2 - Second homes. The home is primarily for the owner's use and they must reside there at least part of the year. Other people can be there with the owner, but they can't live their year-round while the owner visits occasionally. These receive a higher rate and down payment requirements... but still much lower than:
3 - Investment properties - everything else. Must receive a Loan Level Price Adjustment to account for the greater risk. That adjustment varies depending on down payment and credit score.
The allegation is that she said she fit into category 2 when she belonged in category 3.
https://selling-guide.fanniemae.com/sel/b2-1.1-01/occupancy-types