Lesson learned. . . seeking encouragement

Lesson learned. . . seeking encouragement

Real Estate Agent · Phila, PA · Member since 2017 · 126 posts · 100 votes

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!

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y

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..

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  • Real Estate Agent · Phila, PA · Member since 2017 · 126 posts · 100 votes
    7y

    @Account Closed Unfortunately I am not able to back out at this point, but many lessons learned for the future that's for sure! 

    (Also to clarify, I saved up enough for 20% down, but chose the 3% down in order to hold on to more cash reserves. I'd gladly switch back to 20% down now to avoid this rental regulation issue, but interest rates have spiked way high and regardless of putting 20% down, my income ratios may not qualify.)

  • Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes
    7y
    Samantha Miller - Wow. From Google it looks like the PHFA program is an affordable housing program with specific income limits to use it, which is probably why they don’t want you to rent out spare rooms or have other income earning people living in the property and not on the loan. Refinancing to another mortgage to change covenants, especially if rates continue to go up, is costly, especially if you have to pay 2-3% of the new loan price (several thousand $$) to get a conventional mortgage with the same or higher interest rate. You’ve heard - if you pay your mortgage and owner occupy, “no one” will police you. You’ve heard don’t worry about it. The question I would ask my loan officer or another program specialist is - if I get married in the future or my relative moves in with me, what happens? Does she/he have to be added to the mortgage in all circumstances, regardless of expected duration of stay? (Do I have to live alone forever?) Overall it sounds like your loan officer didn’t explain all the rules of the program he/she put you in. If you think it may have been in some literature you didn’t read, that’s on you. I’ve met a lot of section 8 tenants who have a side income earning boyfriend/girlfriend in the house who is not on the lease or sec 8 paperwork. I think it’s shady because the government shouldn’t be paying the housing assistance if the household isn’t actually low low income. However, the fragility of relationships and the difficulty of getting section 8 make me compassionate about the logistics of it all. If I really earn nothing or minimum wage and have children, I truly need the help. If the father is unreliable and comes and goes, I don’t want to be evicted because he left and isn’t contributing right now, and I lost my section 8 voucher because of his theoretical income.
  • Rental Property Investor · Richmond, VA · Member since 2017 · 295 posts · 229 votes
    7y
    @Samantha Miller I am currently a “roommate” / “adult with an income” in a house with a similar type loan provided by our state FHA in Virginia and have been for over 5 years. At least in our state, no one will police this. They don’t want people taking advantage of an MCC (like one spouse on a mortgage while both spouses are working, so technically they wouldn’t qualify for the down payment assistance and MCC). Don’t think too much about it. How would your lender ever know you had a roommate? They have bigger issues to worry about than you making some side money by having a roommate. It’s more of a scare tactic to reduce the number of people abusing the system.
  • Real Estate Agent · Phila, PA · Member since 2017 · 126 posts · 100 votes
    7y
    @Natalie Schanne Yes definitely, the refinancing would be costly and not ideal. My preference would be to switch to conventional now, before closing, if possible. It’s what I would have done all along had I known about these restrictions, but I did not have to sign that until much later in the process. Again, lessons learned.
  • Mark AinleyBusiness Member
    Property Manager · Roselle, IL (Chicago Suburb) · Member since 2013 · 2k+ posts · 1k+ votes
    7y

    @Samantha Miller just sent you a PM. 

  • Real Estate Agent · Phila, PA · Member since 2017 · 126 posts · 100 votes
    7y
    @Account Closed Exactly! I’m just not comfortable with that.
  • Member since 2018 · 22 posts · 5 votes
    7y

    I have never heard of something like that.

  • Real Estate Investor · Bedford, NH · Member since 2008 · 45 posts · 3 votes
    7y
    @Samantha Miller how would you get caught?
  • Real Estate Agent · Phila, PA · Member since 2017 · 126 posts · 100 votes
    7y
    @Jeff Licciardi The question really isn’t whether I’d get caught. It’s that I want to play by the rules for my own conscience.
  • Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    7y
    @Samantha Miller Do what you want. There’s no roommate police... as long as they are getting their $...
  • Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes
    7y

    That's awful. I don't even know if my mortgage allows or doesn't allow roommates. Too late now--I've been renting the spare bedrooms of my primary for over 2 years. It cracks me up how often banks/lenders act against their own best interests. I haven't had a full month of vacancy since I became a landlord. That additional income ensures they are OVERPAID every month. I really hope you figure something out. 

  • Real Estate Agent · Phila, PA · Member since 2017 · 126 posts · 100 votes
    7y

    @Nicole Heasley Beitenman I completely agree! My thought was that it is extra assurance that they will get their money, and likely I'd put even more towards principal each month! I think the issue is that this particular type of loan is designed for those who would otherwise struggle to be approved. While I was excited to take advantage of owner-occupant financing, it was never my intention to use a program designed specifically for those really struggling. It's really my high student loans and modest salary that fit me into the criteria, but I don't know if my situation is quite the target for this type of loan. All I knew was that my lender called and said "hey I found a low down payment program that you qualify for" and I said "great"...until I saw that fine print, thus my extreme confusion as again I know I told him I wanted to have roommates. Thanks for your support! I hope I figure something out too.

  • Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes
    7y

    @Samantha Miller Why not go FHA? You'd still only have to put 3.5% down.

  • Perth Amboy, NJ · Member since 2018 · 38 posts · 18 votes
    7y

    You have my permission to rent out those rooms :)  .....No lender will harass you in your house as long as they get their payment. 

  • Real Estate Agent · Phila, PA · Member since 2017 · 126 posts · 100 votes
    7y

    @Nicole Heasley Beitenman FHA apparently changed their student loan requirements more recently. They have to count 1% of the loan total as your monthly payment, even if you are actually on a plan that requires lower payments. My lender tried me for FHA and it was a no go :(

  • Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes
    7y

    You're kidding. That's ridiculous. I hope they don't complain when they see homeowner rates plummet. Thank God I got in when I did. I was going to refi and do a 203k on a duplex, though. I wonder if this screws up that plan.

  • Real Estate Agent · Phila, PA · Member since 2017 · 126 posts · 100 votes
    7y

    @Nicole Heasley Beitenman You might still be ok, I think it just depends on the overall debt to income ratio. For some people, if their income is high enough, you could count that 1% and still be fine (your ratio would be higher, but you might still qualify). In my case, taking the 1% tipped my ratios over to the other side of the line :( I would just write down all your student loan totals, take 1%, and look up the DTI calculation to run the numbers and get an idea of where you fall when taking into account your income and other debts. Talk to a lender as well, to see what they get. I hope that helps!

  • Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes
    7y

    Thanks! Good luck to you!

  • Investor · Cincinnati, OH · Member since 2015 · 242 posts · 182 votes
    7y
    @Samantha Miller. You said you’re too far in to back out of closing. You’re not willing to skirt the rules. So that’s the end of it, your decision is made. You’ll follow through with the purchase and won’t rent extra rooms for 12 months. Move on mentally, it’s done. Focus on the good reasons you did it. Leveraged down payment program, low interest rate, etc.
  • Real Estate Agent · Phila, PA · Member since 2017 · 126 posts · 100 votes
    7y

    @Jeff Ronningen You're right! There are definitely still positives. As stated in the title of my post - "lesson learned". But I still see value in sharing experiences with the BP community, even if there isn't an answer to the problem! I've gotten more replies on this thread, plus inbox messages and connection requests, than anything else I've posted here on BP. I see this as a forum for sharing good and bad experiences, tips, suggestions, encouragement, etc. I hope that means others will read this thread and find it helpful! Another positive. 

  • Contractor · Baton Rouge, LA · Member since 2018 · 10 posts · 7 votes
    7y
    @Pedro Torres in my opinion it’s an awesome market. Lots of areas are being revitalized. WIth the introdIctIon of the OpportunIty Zones, It only creates more opportunItIes.
  • Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
    7y
    @Samantha Miller you want to play by the rules for your own conscious even though you feel deceived, the rule is novel and bizarre, and they have no possible way to enforce it. I don’t think it’s your conscious you’re submitting to
  • Real Estate Agent · Phila, PA · Member since 2017 · 126 posts · 100 votes
    7y

    @Steve B. It is admittedly a mix of conscience and fear. Although it seems unlikely I'd be caught, there is still some chance. But also, my goal was never to try to make a quick buck. I want to build something - on a solid foundation. It took me a long time to educate myself on financial intelligence, and correct the mistakes of my past (i.e. student loans) that set me back. I worked jobs on the side of my 9-5 to save up for a down payment. My hope is to prove that hard work and financial education alone CAN make you successful, without having to skirt the rules. It's the principle of it.

  • Developer · Chicago, IL · Member since 2013 · 433 posts · 357 votes
    7y

    What if your roommates didn't have a lease and simply contributed to your car payment or any debt that doesn't go directly to the mortgage? I don't know much about traditional lending, just thinking outside of the box.

  • Investor · Cincinnati, OH · Member since 2015 · 242 posts · 182 votes
    7y

    Samantha, completely agree about sharing.  Just trying to give you a mindset of not regretting or worrying about a decision that's already made.

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