Lesson learned. . . seeking encouragement

196 Replies

Hey BP. I wanted to share a tough lesson learned, partly to help others learn from my experience and partly to seek any words of wisdom/encouragement. :(  Thanks in advance!

I am just 2 weeks from closing on my first property. My plan all along had been to rent out the spare rooms while living in one, and live for free! While I can afford and qualify for the place on my own, I was excited to accelerate my savings rate while building equity and jumpstarting my real estate investing career. I had done plenty of research on the zoning and occupancy laws in my state to make sure I was good to go! However, I read the fine print on a mortgage document I was asked to sign the other day, which stated that I am not allowed to rent out rooms with this particular loan. I brought this to the attention of my lender, as I could have sworn that I had shared my plan to rent out rooms from the very beginning! It was my whole reason for purchasing a home all along. To my dismay, he claims I never mentioned this to him, and of course I don't have it in writing so - no proof. Sigh. Granted, I can always wait the 1 year minimum on the loan before moving out and renting the place then, or refinancing, but I had built my whole plan around the idea of renting the rooms from the start - and I wanted to do it legally! It didn't occur to me that my lender would have restrictions. Also, I asked my lender if they had any other types of loans I could switch to that allow this, but interest rates have gone up since my commitment and it is unlikely I'll qualify for any other types of loan at this time, at least before closing. I was disappointed to say the least. Now I am just hoping that it will be worth the wait to rent out the rooms or whole place later down that line, when I am allowed to do so. Anyway, I hope this post is helpful as a learning experience, and would love to hear if anyone else has ever had something like this happen and managed to see the positive side!

Thanks BP!

Updated 5 months ago

*** Adding the link to the actual document (just a template, no personal info filled in) for anyone curious: https://www.phfa.org/forms/sellersguide/forms/03.pdf

I really have never heard of a mortgage that does not allow roommates who pay for rooms.. your not running a boarding house you LIVE there right ? the main issue is you have to owner occ.. if you rent a room out I really don't think that is a violation.. @Samantha Miller    @Chris Mason   Chris is an expert at these loans maybe he has a suggestion..

@Jay Hinrichs that's what I thought all along! I'd never heard of this being an issue as long as I was living there, which I absolutely would be. It's PHFA (Pennsylvania). The mortgage affidavit clearly states "Except for half of a duplex, rental of any portion of the property is not allowed as long as the mortgage loan or MCC is outstanding..." :(

Originally posted by @Samantha Miller :

@Jay Hinrichs that's what I thought all along! I'd never heard of this being an issue as long as I was living there, which I absolutely would be. It's PHFA (Pennsylvania). The mortgage affidavit clearly states "Except for half of a duplex, rental of any portion of the property is not allowed as long as the mortgage loan or MCC is outstanding..." :(

 wow shoot .. never heard that one before .. but like all things real estate right about the time we think we know it all we don't

I don't want to say ignore the rule... but I would look into it as far as you can

@Jay Hinrichs I know right! Honestly I've been asking around about this non-stop since it happened, and everyone has implied that it's not heavily policed and most people just ignore/get away with it! I'm just not comfortable with that. But truly I don't understand the point of it - why is a duplex ok and not a SFH, if the city occupancy/zoning regs are fine with it?! I understand not wanting to give investors the low down payment options that are meant for owner-occupants, but how is the duplex any different?

Originally posted by @Samantha Miller :

@Jay Hinrichs I know right! Honestly I've been asking around about this non-stop since it happened, and everyone has implied that it's not heavily policed and most people just ignore/get away with it! I'm just not comfortable with that. But truly I don't understand the point of it - why is a duplex ok and not a SFH, if the city occupancy/zoning regs are fine with it?! I understand not wanting to give investors the low down payment options that are meant for owner-occupants, but how is the duplex any different?

 I cant tell you what to do and I understand that these need to be owner occ.  but getting roomates to me is something so many folks do I just don't see the big crime in that.. as long as your living there.. but if your uncomfortable then maybe look at a different loan product.

@Jay Hinrichs I totally agree with you on not seeing the logic in it. I'm just a worrier with this kind of thing - the stress of being "caught" would not be worth it. I'm hoping I can qualify for another loan product, or at the very least I'll just stick it out for the year. Thank you for your input! At least someone else agrees it's a strange rule. 

Originally posted by @Samantha Miller :

@Chris Mason If you do have any thoughts/suggestions I would greatly appreciate it!

 I too have never heard of such a thing. :\

Seems absurd. You can't go around telling homeowners that their significant other, etc, can't move in unless they are freeloading. 

@Chris Mason   I would never tell some one to break a loan covenant but this one is over the top.. and reality is who is out there to enforce this.. a year goes by pretty quick..  

@Chris Mason I really don't get it either. And that's not the only clause in there that restricts renting. There is other language about not allowing any additional income-earning adults live in the place for a year unless they are listed on the mortgage. And the worst is the penalties - $10k fine and 30 year prison sentence...? It's pretty absurd. A copy of the template is here. If anyone interprets differently, please let me know! 

Originally posted by @Samantha Miller :

@Chris Mason I really don't get it either. And that's not the only clause in there that restricts renting. There is other language about not allowing any additional income-earning adults live in the place for a year unless they are listed on the mortgage. And the worst is the penalties - $10k fine and 30 year prison sentence...? It's pretty absurd. A copy of the template is here. If anyone interprets differently, please let me know! 

Ooooh, that explains why it's allowed. I didn't read it in detail, but you're using one of the state gov't down payment assistance and/or MCC programs. When the gov't does it, all the rules the private sector must abide by go out the window. Similarly I can cite numerous FHA and VA guidelines that would be in violation of federal fair housing laws if Fannie Mae or Freddie Mac did it.

"Do as I say, not as I do" - Government

@Chris Mason Haha. Yes I totally expected the gov down payment programs to be stricter, but from all the research I did prior to this it was my understanding that it's only an issue if you up and leave the place to rent it out. My impression was that an owner occ could rent out a room, especially if they're allowed to rent out 1/2 a duplex! 

Go to closing in 2 weeks! Do not over think this one. That is all I will say lol.

I'm in a similar position with my current house. I'm not allowed to rent it out because I used a VA loan. The issue comes because I want to use a property management company which might throw a flag up and I don't want to get in trouble.

My best solution is to either keep living here or refinance my loan into a conventional one then rent it out. (I'd have to move of course) 

Is it possible for you to walk away from closing? I'm not sure how far along everything is for you. It might be better to just stay where you currently are and save up money to get a conventional or FHA loan, whichever one doesn't have the rental restrictions. Yeah the rates might be higher but it's worth it. I'd rather have a 5% rate while renting out rooms than a 3% without it. I wouldn't worry about the rate if you ran the numbers on the ROI. (as long as they aren't astronomical of a difference).

@Benjamin Haberman Haha thanks for the encouragement! I'll absolutely still go to closing. I was approved based on my qualifications/income alone, and I am comfortable covering the expenses myself. But due to conscience (a.k.a fear) I will wait a year to refi/rent :( 

Originally posted by @Samantha Miller :

@Benjamin Haberman Haha thanks for the encouragement! I'll absolutely still go to closing. I was approved based on my qualifications/income alone, and I am comfortable covering the expenses myself. But due to conscience (a.k.a fear) I will wait a year to refi/rent :( 

Good luck!!!!

@Pedro Torres Thanks for your input! You would have to move out if you refi?

For me it's unfortunately too far along to back out, unless something else falls through between then and now that I'm not thinking of. But I'm OK with going forward and sticking it out. It's just disappointing that's all. I hope it works out with your situation!

@Samantha Miller Well I meant that if I refinance and then rent the entire house out then I wouldn't have a place to live. So It's hard for me to get a refinance loan and a conventional loan for my future house. 

So I decided that I will just stay in this house and build up the equity, then use that to fund my next purchase with a HELOC.

So there's always a plus side, you will be building equity (or already have some) while you live in the house. Did you get a good deal on your house? 

@Pedro Torres You're right - thank you for the positive thoughts! I did analyze the property from the start as though it were meant to be a rental, to make sure it was a good deal in that sense, and would cash flow (both while living there and after I moved out). It's also located in a quickly developing/appreciating area of the city. So I'm still happy with the purchase, just disappointed to have to delay a year on the benefit of roommates. Could you refi and then stay and just rent the spare rooms?

@Samantha Miller like @Jay Hinrichs said a year goes by so fast. As long as you can afford it on your own and it will rent and cash flow after a year than it was a good buy especially if it’s low money down and your first buy! So do what your comfortable with and if I got stuck staying somewhere and couldn’t rent it out, I’d be looking at how I could force some appreciation into the property in my spare time while living there.

@Samantha Miller - A year isn't so bad in the grand scheme of life though. I'm looking at about a year to be able to purchase my first investment property (I don't count my current one, although it does have 50k of equity currently. I just don't have the credit score to tap into it yet. 

I could rent out 2 of my 3 rooms but 1 of them I've turned into a music studio. I tend to practice/play randomly throughout the day and night.  That wouldn't be acceptable with roommates. 

I'm a pretty impatient person so I want to get my first investment property ASAP. unfortunately I live in Las Vegas and investing here is expensive. One goal is to find a partner on the east near Milwaukee or Chicago where I would fund the down payment and they would provide the credit & be local to do the rehab. I can come up with 6k-10k within 3-4 months but that's usually only enough for down payments and not any rehab. 

I've heard about partnerships and building teams but not sure how I can find someone to trust from across the states. 

I would like to know how this is intended.  If a person vacates the home and rents it, i get it.  However, it would seem extreme if you couldnt even allow your elderly mother to live in your home and contribute to the finances.  It would likely seem unreasonable that you couldnt have a roommate.  I would think you are not breaking the rules as long as its owner occupied, but i dont know for sure.  I am in WI.  But i would be consulting someone other than your lender if they already let you down. 

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@Samantha Miller - this seems to be a niche product, because I've never seen such a provision. Here's my $0.017 Euros......if you intend to live in the home for a long time, do as you please. It is my opinion that what you do within your home is your business. On the other hand, if you intend to leave before too long and have that as part of your real estate portfolio, close with a different loan. The lender could see you as violating their rules.

99.9% of the time a lender will not ever bother you as long as you pay your mortgage on time. When it comes to these special programs, their motivations may be different. 

Any reason you don't go with a conventional loan?

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