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

    @Mike B. I had the same thought. Again, I don't want to break any rules, but I tried to see if there were any allowable exceptions. Upon reading more though, there is also a clause that any income-earning adults expected to live there within the 1st year must be on the mortgage app. So it sounds like even if they don't plan to contribute to monthly payments, I have to list them anyway. Further, I would want to report any income (whether I call it "rent" or something else) that I earn from the roommates on my tax return, and I wouldn't want that to raise a red flag either. 

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

    @Jeff Ronningen I appreciate that! Agreed. Hindsight is always 20/20, so better to just move forward and find the positive. Thanks!

  • Rental Property Investor · Lodi, CA · Member since 2018 · 206 posts · 115 votes
    7y

    @Samantha Miller

       At the end of the day you're still getting your first property and future rental. If it slows you down for a year you're still building equity and have learned from this. This time next year you'll be in a better position.

       Congrats!!

     - Mike

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

    @Michael Kistner Thank you! Agreed. Always value in a lesson learned, and still many positives. Thanks for the support!

  • Rental Property Investor · Winona, MN · Member since 2018 · 87 posts · 90 votes
    7y
    @Samantha Miller would it work to have your “friend/roommate” pay for the utilities, taxes/insurance and/or other ecoenses assicisyed with this house instead of paying you “rent”?
  • Detroit · Member since 2018 · 27 posts · 19 votes
    7y

    @Samantha Miller as they say in the podcasts, if you have one rental you are still way ahead of the game than most of the pack! Even if you don't find a loophole you are comfortable with, you are still building equity in your new house over a year until you can either house hack it, re-fi and buy another, or even save up buy a 2nd and then re-fi and buy a 3rd! Just a speed bump. 

  • Rental Property Investor · Fort Collins, CO · Member since 2008 · 168 posts · 105 votes
    7y

    @Samantha Miller This is a first for me. I've never seen a mortgage that says you can't rent out rooms. I think that's absolutely ridiculous and quite dumb for a mortgage company to not allow the owner to pay them back by any means necessary. Unreal...I would delay closing and start looking for a new mortgage company ASAP. 

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

    @Adam M. It really is interesting! I'd be curious to better understand the true intent of the rule. I may be a rule-follower, but it doesn't mean I don't question them! I understand the spirit of preventing investors from using loans meant for owner-occs, but that argument doesn't fully explain this provision in my opinion. I don't see a meaningful difference between renting out 1/2 a duplex (which this loan DOES allow) versus renting out the rooms in an SFH (which it DOESN'T allow). The preclusion of one over the other doesn't make sense to me.

  • Rental Property Investor · Augusta, GA · Member since 2017 · 825 posts · 278 votes
    7y

    It was in the fine print of my first home in Minneapolis, with a conventional lender. I also freaked out a little. I qualified on my personal income, and it was a matter of "don't ask, don't tell." After the loan closes, why should they care as long as the mortgage is paid?

  • Real Estate Agent · Augusta, GA · Member since 2017 · 71 posts · 22 votes
    7y
    @Jay HinrichsI agree with you. Rent the rooms and don’t worry about it. It’s your house, you can rent whatever you want!! Maybe check with another loan officer there also, maybe he is misunderstood😳
  • Jennifer T.Pro Member
    Investor · New Orleans, LA · Member since 2014 · 1k+ posts · 944 votes
    7y

    Not quite the same situation, but I'll tell my story.  I almost bought my first home (duplex) under a special Soft-Second mortgage program, that had income limitations to be eligible.

    In a nutshell, the way it worked was participants could buy a house for up to $65K more than what they qualified for by a participating bank and the "difference" would be funded by the program as a soft-second mortgage.  That soft-second part would be forgiven at different percentages, the longer the participant was an owner-occupant.  After 10 years, it was totally forgiven.

    Quite frankly, it was a poorly run program and I did know that going in.  I POURED over the fine print many, many times.  Duplexes were definitely allowed, but I know I was discriminated against by the employees running the program.  A very long story, short.  They made up a rule...that wasn't written down anywhere...that the "potential" income (that they determined) from the other side of the duplex would be included in my CURRENT income.  And the overtime at my job which I'd earned during a special period at my job the year before, would also be included.  Even though I had paycheck stubs going back for months showing that I no longer made that much/worked OT.  Interesting.  Because, of course, my bank didn't count any of that.

    Due to all the made-up b.s., I "magically" no longer qualified.  I made less than $400 too much (annually) to qualify.  Yep.  You all read that correctly.  $400...a YEAR...too much.  Though does it really matter?  I suspect they would have fudged the numbers or made up something else to keep me from qualifying.  I was literally told, "But that's not REALLY what this program is for."  I was discriminated against for other, uglier reasons also.  But we'll just leave it at that.

    I'm pretty sure I could have had other "income earning" adults living on my side, but don't know that for sure.  However, 10 years would be a long time to expect someone to not get married or divorced/married again.  Heck, or have their child grow up and get a job! 

    Not related to that program, my other surprise in my first home purchase was my bank (different bank, this time) had much higher financial/credit standards for me to buy a duplex as opposed to a SFH. Even though I would be an owner-occupant, I was required to put a 20% DP instead of a 5% one. Whereas, if literally the exact same house and same price point had been a SFH, a 5% DP would have been just fine. Part of that was also my credit was decent, not excellent. But still. It was absolutely maddening. The price of the house was almost half of what I qualified for, just on my own income.

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

    @Jennifer T. Thank you for sharing! Wow, what a frustration! I am sad to hear something like this. I am continuously learning that we have to be our own experts/advocates and question everything! Even when you play by the rules, there is no guarantee that others will, or that you will be treated the same as any other. :( I really hope you were able to find a way to buy your duplex! It's good that you found BP - the support on this forum can be really motivating through these disappointments. 

  • Rental Property Investor · Union, ME · Member since 2018 · 161 posts · 104 votes
    7y

    @Samantha Miller I had a similar experience with mine... except my lender required an extra $2,500 down at closing with two weeks notice! Hang in there, maybe use this as an opportunity for renovations of said rooms! That's what I've done, and I am about to lease my SFH to a 12 month lease. It'll have a good ending, just wait it out!

  • Real Estate Agent · Phila, PA · Member since 2017 · 126 posts · 100 votes
    7y
    Originally posted by @Bryan Clement:

    @Samantha Miller I had a similar experience with mine... except my lender required an extra $2,500 down at closing with two weeks notice! Hang in there, maybe use this as an opportunity for renovations of said rooms! That's what I've done, and I am about to lease my SFH to a 12 month lease. It'll have a good ending, just wait it out!

     I think that is a great suggestion (RE: room renovations)!

  • MD · Member since 2017 · 5 posts · 3 votes
    7y
    @Natalie Schanne It is unfortunate though that people with low incomes are restricted from trying to get ahead by renting out their own space. I understand not being able to rent out your Section 8 space, that seems fair enough in some respects. But if someone can buy their own place despite having a low income that qualifies for a special mortgage, why restrict those people from getting a financial step up? This to me is basically saying "sure I'll let you out of the rain but you must stay wet". Doesn't seem very encouraging.
  • Real Estate Agent · Phila, PA · Member since 2017 · 126 posts · 100 votes
    7y
    Originally posted by @Nathan Gough:
    @Natalie Schanne It is unfortunate though that people with low incomes are restricted from trying to get ahead by renting out their own space. I understand not being able to rent out your Section 8 space, that seems fair enough in some respects. But if someone can buy their own place despite having a low income that qualifies for a special mortgage, why restrict those people from getting a financial step up? This to me is basically saying "sure I'll let you out of the rain but you must stay wet". Doesn't seem very encouraging.

    I agree. And to add to this, some might argue that zoning/occupancy restrictions are the reason for the provision - but this is not the case, at least in my scenario. With a small annual license fee, a single family home can have up to 5 unrelated boarders in my city. The city says it's fine, the lender says no. Further, I would understand if someone was trying to do something funny with their own qualifications - making it look like they qualify alone, when really they might be depending on income from others who may come and go, posing a risk to the lender - again, not the case here! Fully underwritten and qualified on my own income, credit, etc. (i.e. high enough to pay PITI, low enough to fit the gov assistance criteria, and all 100% valid and true - no number fudging.) Again, this is not a "please solve my problem" post - it is what it is. But I think it's an interesting question/discussion!

  • Jennifer T.Pro Member
    Investor · New Orleans, LA · Member since 2014 · 1k+ posts · 944 votes
    7y
    Originally posted by @Samantha Miller:

    @Jennifer T. Thank you for sharing! Wow, what a frustration! I am sad to hear something like this. I am continuously learning that we have to be our own experts/advocates and question everything! Even when you play by the rules, there is no guarantee that others will, or that you will be treated the same as any other. :( I really hope you were able to find a way to buy your duplex! It's good that you found BP - the support on this forum can be really motivating through these disappointments. 

    I forgot the encouragement part :).  I did buy that duplex (still my personal home), though had to borrow money from my mom for the down payment, lol.  I had to submit a "gift" letter to my lender.  But he and I (and my mom) knew it was a loan.  Knowing what I know now, I probably took more gamble than I should have because I didn't have much in the way of cash reserves and the house definitely needed some fixing up.  But I could easily afford the mortgage payment without tenants, so I went for it.  The mortgage payment was also less rent than I'd been paying.

    Best financial decision I have ever made! Once I got the tenant side fixed up, I rented it out for a few hundred more than my mortgage payment. Game changer! That success and extra income motivated me to buy more rentals. Helped by the fact that my property skyrocketed in value. Within just a few years, I was able to get a large line on a HELOC. Pay my mom the rest of her loan back in one chunk. And use the HELOC to help with down payments/renos on other properties. In 7 years, I've added two more duplexes and one SFH.

    It sounds like there are a lot of perks for the house/loan you chose.  It is a bummer you can't have roommates right now.  And it will be an extra hassle and an expense to do a refi later, so that you can change the loan type and have roommates.  But, in the grand scheme, I think you'll look back and see this as a minor bump toward greater things!

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

    @Jennifer T. What a great ending to the story! This is really encouraging, thank you for sharing!

  • Rental Property Investor · Pittsburgh, PA · Member since 2016 · 9 posts · 4 votes
    7y

    Crazy rules! The reality is you have a loan and home that works for you. If you are not comfortable ignoring the rules, just don't rent rooms for the year. Also, if you decide to get a serious boyfriend/husband during that time, make sure he's a jobless freeloader, so he doesn't violate the mortgage.  :-D

    It will all work out well. It's only a year.

  • Rental Property Investor · Monterey, CA · Member since 2014 · 23 posts · 11 votes
    7y
    @Jay Hinrichs completely agree!
  • Member since 2018 · 9 posts · 0 votes
    7y

    I didn't read all the replies but, I don't think it's a problem, Most Mortgages want to know that you are living on the property for Owner Occupied status, Not an Investment Property (Rental) your case it is Owner Occupied because you are owner occupying the subject property that the mortgage is on.

    Mainly this is for 2 reasons  1 the Interest rate is lower for Owner Occ. and  2 the lender wants to be able to sell your loan as Owner Occ. 

    Don't make a big deal or worry about this and it will be fine AS LONG AS YOU ARE OCCUPANCY IS THERE !

    Blessings,

  • Dallas/Fort Worth · Member since 2017 · 22 posts · 5 votes
    7y

    @Samantha Miller

    I haven't gone through every comment, but have you tried working with your lender to add an addendum before you close that waives that portion of the document, or perhaps allows you a small portion of time, say 2 years, to rent it out while you yourself are a full time resident there? If that doesn't work... I'd tough it out, complain to the lender about future business possibilities being impacted - and then refi and absolve yourself of the lenders strange contractual language. Hate that fine print and that this happened to you... good luck!

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

    @Dylan Hargrove It's worth a shot! Thanks for the suggestion! I'll bring this up with my lender and see what happens. Otherwise, I agree re: absolving myself later down the line.

  • Real Estate Broker · Windsor, CT · Member since 2015 · 1k+ posts · 268 votes
    7y

    @Samantha Miller what if you had a significant other who just so happened to pay a portion of the mortgage monthly? Is that not the same as a roommate? I would say that as long as you are living there it should be fine. I mean people have family members and friends who have to move with them all the time. The lender can't bar you from having family or friends or complete strangers who want to help you pay your mortgage ;) I think it should be fine as long as you make sure to pay on time and don't give the lender any reason to come snooping around on your property... 

    NOTE: This is not legal advice, I am not licensed to give. Just my own experiences and have never seen a clause as such. 

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

    @Melissa Gittens Yea many people I spoke to raised the same question! I had that thought as well. However, per the language in the affidavit, you would be required to tell PHFA if you had said significant other move in within the first year. 

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