Loan Options - Primary Residence vs. Investment Property rules
Hi, all! My name is Thomas and I am at the VERY beginning of my real estate investing journey. Bigger Pockets has helped my confidence to get started, so I'm very excited to be here.
I currently reside in Montgomery County, Maryland, which is a fairly expensive market to buy/sell real estate in. I was having a conversation with a friend who invests in real estate, and I told him my concerns about having enough cash for a investment property. 15%-20% down to secure traditional financing is a lot of dough, but my friend suggested that I apply for a loan as a primary resident, and then rent it out anyway. I feel like that's a "too good to be true" scenario, but I'm not sure if that's something folks here have done before.
So there's my question: is it possible to apply for a loan as the primary resident, and then rent out the property? Is there a time limit before I can do that? Or, better yet, am I thinking about this all wrong?
Any help is much appreciated-- thank you, all!
Thanks for asking your question. Your conventional mortgage will be around 20-25% down (banks call this 75-80% LTV or loan to value). To get a lower down payment, many people will get a FHA government-backed loan. The federal government essentially guarantees to the bank that the money they loan will be repaid. If you default, they can get it back from the government. This is a plan to help homebuyers who otherwise couldn't buy due to not having enough down payment or credit. Right or wrong, the creators of this type of loan want to have these types of buyers in houses, not investors.
The bank who is issuing an FHA loan needs to do diligence to be sure that the homebuyer will be living in the house. The banker is not driving by your place spying on you, though. This is the reason your friend recommended this strategy. The problem for the owner arises when, occasionally, the bank will get audited and they need to assure the auditors that their mortgagees are actually living in the house. If you are not, then the bank may exercise a clause that makes the entire loan immediately due. That would be the worst case scenario for you.
Another problem with this strategy is it is not expandable. The bank will immediately know you are not living there any more when you come to them asking for the next FHA loan.
My advice is that while you probably might get away with doing this once, it'll not be sustainable. Why not save up for the 20% down and start with a good chunk of equity that will help you for the more difficult times that can come in real estate?
Quote from @Thomas Cuddihy:
Hi, all! My name is Thomas and I am at the VERY beginning of my real estate investing journey. Bigger Pockets has helped my confidence to get started, so I'm very excited to be here.
I currently reside in Montgomery County, Maryland, which is a fairly expensive market to buy/sell real estate in. I was having a conversation with a friend who invests in real estate, and I told him my concerns about having enough cash for a investment property. 15%-20% down to secure traditional financing is a lot of dough, but my friend suggested that I apply for a loan as a primary resident, and then rent it out anyway. I feel like that's a "too good to be true" scenario, but I'm not sure if that's something folks here have done before.
So there's my question: is it possible to apply for a loan as the primary resident, and then rent out the property? Is there a time limit before I can do that? Or, better yet, am I thinking about this all wrong?Any help is much appreciated-- thank you, all!
You would be doing a mortgage fraud if they find out and may call the whole loan due.
You're asking the right questions...what your friend suggested is fraud, but you can do what is suggested without committing fraud if you simply follow the guidance in the note itself.
Can you buy a primary residence and then rent it? In short yes. That said you can't do so immediately, and you will be agreeing to initially live in the home as your OO primary residence. The OO provision in the loan is 12 months of OO as your personal primary residence.
That's the answer to your next question of the time limit before you rent the home...12 months to ensure you've satisfied your OO provision.
If you do that then there is no chance of having any issues with the lender as you met the conditions you agreed to.
Welcome to BP @Thomas Cuddihy.
Do people do that? Absolutely.
Is that mortgage fraud and a federal crime? Absolutely.
In the past have lots of people gotten away with it? Absolutely.
Are more people currently being prosecuted for owner occupancy mortgage fraud than in the past? Absolutely.
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Quote from @Benjamin Aaker:
Hi Thomas,
Thanks for asking your question. Your conventional mortgage will be around 20-25% down (banks call this 75-80% LTV or loan to value). To get a lower down payment, many people will get a FHA government-backed loan. The federal government essentially guarantees to the bank that the money they loan will be repaid. If you default, they can get it back from the government. This is a plan to help homebuyers who otherwise couldn't buy due to not having enough down payment or credit. Right or wrong, the creators of this type of loan want to have these types of buyers in houses, not investors.
The bank who is issuing an FHA loan needs to do diligence to be sure that the homebuyer will be living in the house. The banker is not driving by your place spying on you, though. This is the reason your friend recommended this strategy. The problem for the owner arises when, occasionally, the bank will get audited and they need to assure the auditors that their mortgagees are actually living in the house. If you are not, then the bank may exercise a clause that makes the entire loan immediately due. That would be the worst case scenario for you.
Another problem with this strategy is it is not expandable. The bank will immediately know you are not living there any more when you come to them asking for the next FHA loan.
My advice is that while you probably might get away with doing this once, it'll not be sustainable. Why not save up for the 20% down and start with a good chunk of equity that will help you for the more difficult times that can come in real estate?
Great insight, thank you so much!
Quote from @Thomas Cuddihy:
Hi, all! My name is Thomas and I am at the VERY beginning of my real estate investing journey. Bigger Pockets has helped my confidence to get started, so I'm very excited to be here.
I currently reside in Montgomery County, Maryland, which is a fairly expensive market to buy/sell real estate in. I was having a conversation with a friend who invests in real estate, and I told him my concerns about having enough cash for a investment property. 15%-20% down to secure traditional financing is a lot of dough, but my friend suggested that I apply for a loan as a primary resident, and then rent it out anyway. I feel like that's a "too good to be true" scenario, but I'm not sure if that's something folks here have done before.
So there's my question: is it possible to apply for a loan as the primary resident, and then rent out the property? Is there a time limit before I can do that? Or, better yet, am I thinking about this all wrong?Any help is much appreciated-- thank you, all!
Hey Thomas, welcome to BP! As others have mentioned, that would be considered mortgage fraud so I would not personally suggest doing that… That being said, as long as you live in the property for at least a year as your primary residence, there’s nothing wrong with getting a housemate while living there to help offset your mortgage/housing costs, and then you could move out after a year and turn it into a rental at that point. Most owner occupied mortgages only require you to live there for at least a year.
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#1 1031 Exchanges Contributor
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@Thomas Cuddihy, There's nothing wrong with this at all. As long as you actually use it as your primary residence long enough to satisfy the loan requirements. Most lenders require a year. When you convert from primary to investment it does give you the opportunity to take out another primary loan at what are usually more advantageous terms than an investment grade loan.
If you've lived in the property for two years you can actually turn it into a rental for 3 more years and when you sell you'll be able to take the first $250K ($500K if married) of profit tax free. If you rent it more than three years or live in it for less than two before you convert it, you'll lose that opportunity. But you'll still have the 1031 exchange option to defer all tax and depreciation recapture if you sell later.
Nobody can tell you it is right thing to do, it is a fraud but many still do it anyways..
However, nobody can tell you you need to sleep in it 365 days.
You can move your address to that location, do a short term rental like airbnb, furnish it, and stay there here and there then you should be fine, you dont have to do long term rental the first year and it is still your home with your own furniture.
The Baltimore City States Attorney is currently being prosecuted by the federal government for claiming Owner Occupancy on a house that she never intended to live in. Google "marilyn mosby mortgage fraud", read a few articles, and then decide if its worth the risk. I personally do not think it is.
You're right that Montgomery County is a very very expensive place to be buying a home, much less an investment property. The good news is that there are plenty of jurisdictions within an hour drive that have lower housing costs.
Good luck and keep posting/asking questions!
Quote from @Ozzy Sirimsi:
Nobody can tell you it is right thing to do, it is a fraud but many still do it anyways..
However, nobody can tell you you need to sleep in it 365 days.
You can move your address to that location, do a short term rental like airbnb, furnish it, and stay there here and there then you should be fine, you dont have to do long term rental the first year and it is still your home with your own furniture.
Haven't heard it better than that there.