BiggerPockets

Hi all- I have a condo I rent out that I originally obtained through a first time home buyer loan. Well my lender sent me a letter because they noticed this isn't my primary residence anymore and the loan states that I need to be the primary occupant for the life of the loan. They said that I need to contact a tax professional because there might be tax implications and it may affect my mortgage interest deduction. Can anybody shed some light on what the penalties are here or the tax implications, how it affects mtg interest deductions.
Thanks in advance!

Jon thanks for this information all very helpful!

What kind of balance are you talking about? Current rates on NOO loans are right about 6%, assuming you have good credit and enough income to qualify. If the rent appears on two tax returns, you can use that, too. I just did one for about $88K and the costs were about $3000. What do you owe and what's it worth. If you're under 70% LTV, you should be able to avoid bringing any cash to the table. If you're over 80%, you'll almost certainly have to make that up. In between, it depends on the lender.

The lender will do a new appraisal. You should be there and be prepared to justify the value you think its worth. However, I would caution you to plan for the appraisal to come in lower than you expect.

You say you talked to the lender, but did you READ the loan documents as Jon suggested earlier? The lender customer service reps aren't always that savvy, so you have to see what you agreed to with your original loan.

You might even find that so long as you were an owner occupant for some period (like one full year) of consecutive months, that you would be allowed to move elsewhere, and keep the loan in place while renting out that condo! So do some reading.

Steve's right, read the note and the other documents. You might be able to find a loophole to leave the current loan in place. Some time with a lawyer might be money well spent. Unless this was some sort of subsidized financing, or specifically limits your ability to move out and rent the place, I don't see they have much of a leg to stand on. What you're looking for is any sort of provision that puts you in default if you move out.

It just occured to me you're talking about a condo. Those can have special provisions for OO vs. NOO. That's because when more than a specific percentage of the units in a project become NOO, the entire project becomes "non-warrantable". That means financing is much more difficult for any property in the project. There could be provisions to try to avoid this.

If you have to refinance, you are going to bring cash to the table. If others are listed for $96K, they're selling for less than that. I don't think you'll find a lender who will go above 80% for NOO loans, and 75% or even 70% is more likely. Even at 80% and a $91K value, you'll need to bring $18K plus costs to the table to refi. OUCH!! Might be time to consider a short sale.

A short sale will knock your credit in the dirt. You may need to get late on the payments to get them to agree. Not as bad as a foreclosure, though, which is where this is headed if you can't refi and they have the legal grounds the call the loan.

Leases typically remain in place when the property is sold, so the tenant would stay there.

I doubt it. HELOCs tend to be limited to 90% at the moment. Realistically, if you sold that house at $270K, you would have bring a few grand to the closing to cover the costs and commissions. Banks know that, and limit the LTVs for HELOCs.

Again, read that note. They may just be trying to bully you. Or, a good lawyer may find some way to avoid them calling the loan.

How long did you live in this condo before moving out? I can't see why the lender would be getting all strung out over this situation with everything else on their plates.

Agreed. Seems very odd the lender is causing a stink. It would be a different situation if you said you were going to occupy it then rented it right away, but three years is quite a while.

There should be a section in the loan papers, specifically the promissory note, called "default". It should list a bunch of reasons the note can be in default. Anything there? Is there a separate document regarding occupancy? That clause you cite is a standard clause, but I've not heard of banks using that to call the note if you've lived there for a while and then turn it into a rental.

May be worth finding a lawyer to have a look at your docs and advise you.

No, you want a lawyer knowledgeable about real estate. Your best bet is a recommendation from someone who has a lawyer they use for real estate. Another possibility is a recommendation from a real estate investment club in your area. If nothing else, start calling and asking questions.

Most lawyers will do a short initial discussion for no charge, just to be sure you know what you're getting and that they can actually help. After that its going to be an hourly rate. The highest I've paid for a lawyer was $200 and that's for someone who had very specific knowledge about what I was dealing with. If you read through the documents carefully, and can say "I see this and this and this here, what does this mean" it should take less time than if you hand over a stack of docs and have them dig through them.