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!

10Reply
412 views

Most Popular Reply

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..

See this reply in the discussion

196 Replies

Jump to latestLatest
  • Real Estate Investor · Austin, TX · Member since 2015 · 214 posts · 234 votes
    7y

    I know someone who bought a property with a residential loan who intended to move in but due to change in her situation instead rented it out to tenants. Somehow she didn't understand that the loan was for a residence and did not allow her to rent the property out.  The lender found out about this violation of the loan covenant and demanded immediate payment of the loan in full. Yes, they called the loan. Luckily, her parents had some cash lying around and they paid off the property. 

    Your loan's restriction, while different, could be enforced in the same way. Read the fine print to see what the consequences are. While I think it would be easy to hide, you have to decide for yourself if it's worth taking such a chance.

  • Rental Property Investor · Boston, MA · Member since 2018 · 34 posts · 20 votes
    7y

    Rent them a parking spot and let them live in the house for free...

  • Johnny PineyroPro Member
    Golden Oak, FL · Member since 2018 · 78 posts · 25 votes
    7y

    Offer the lender some consideration in exchange for the "waiver".  Also, add to your insurance with rider for the "unit rental". It won't cost much and provide the lender the additional insured or interest protection which should satisfy them.

  • Real Estate Agent · Cleveland, OH · Member since 2017 · 41 posts · 32 votes
    7y

    Hmm rules, rules, rules.

    Unless your lender is living with you in one of the rooms, rent as you please & don't look back. 

  • Lender · Orange County, CA · Member since 2018 · 30 posts · 9 votes
    7y

    @Samantha Miller

    I didn't read through this entire thread so someone else may have mentioned this already and your lender definitely should have pivoted to this based on your concerns, but Fannie Mae and Freddie Mac both have products that allow for 3% down without these restrictions. Ask your lender about Home Ready/Home Possible.

  • Madisonville, LA · Member since 2018 · 125 posts · 71 votes
    7y
    At first I was thinking screw the rule and just do what you want. But after seeing it's a govt. Assisted loan I wouldn't do that. My view is it's a loan to help people get in thier first house without having a big downpayment and if I signed up for that type loan I would abide by the agreement. I can see why its setup up that way. Since the assisted part is in essence coming from taxpayer money than it could be viewed as a loophole to scam the system if someone was turning a profit on it so I kind of understand the rule... I think lol
  • Financial Advisor · Charleston, SC · Member since 2018 · 1 post · 0 votes
    7y
    @Samantha Miller Hello, I just want to say that you are very smart to think like an investor for starters. As far as renting your house, I believe it was told to me when I closed on my property over 10 years ago. What I gather from that was I could not rent it out without being physical present. However, times has changed and you could certainly rent it out like others on Airbnb. As long as it is not used as an investment property and used solely as your primary residence you could rent out half your home.
  • Carlsbad, CA · Member since 2016 · 1 post · 0 votes
    7y

    have your friends come visit you temporarily and let them pay you for your protection

  • Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes
    7y
    @Samantha Miller The hefty fine indicates they believe your “ living with an income earning adult” will constitute mortgage fraud. You are recieving a type of “welfare assistance” through your loan and if you really do not qualify if your living arangements are not as stated on the loan. Do not commit fraud. Just wait a year.
  • Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Samantha Miller:

    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!

     Uhhhhhhhh

    There is nothing “illegal” about renting out rooms no matter what loan docs say. At worst it would be against the loan policy. 

    This is where I’m maybe a bit different and why I don’t give out much advise but I say “who gives a sh1t”. Lease out your rooms all you want. Do you think the lender will find out or care? And st worst, they find out and give you X days to cure. 

    If you’re going to let something like that stop or slow you down at this stage, I can tell you that you’re going to face MUCH MUCH larger obstacles later. 

  • Palm City, FL · Member since 2018 · 24 posts · 8 votes
    7y

    HOW TO GET AROUND THIS:

    .

    Renting condos in Fla has a similar barrier; no 1st year rentals. Many get around this by adding the renter to the initial occupant list, then removed them after a year. You could simply do the same. 

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

    @Will Hanner Does the bank then need to go through the whole approval/underwriting process with the person added? I wouldn't want my renter having to go through hoops just to get on my mortgage documents, only to then move out 6 months later. And does that not still conflict with the "no rental allowed" portion? The non-rental language and the no income-earning adults language are under separate sections of the affidavit, so I am not sure I understand if they interact or conflict with eachother in that scenario. 

  • Rental Property Investor · Houston, TX · Member since 2015 · 43 posts · 28 votes
    7y

    I can't help but think of this as a new attempt for lenders curb house hacking efforts for VRBOs and AirBnbs, which they may view as a business.  An insurance issue?  Never seen or heard of this fine print before.  Time to start paying more attention to these things moving forward.  Thank you for sharing.

  • Member since 2018 · 34 posts · 55 votes
    7y
    @Samantha Miller I ran into this myself. My local government sent me a document telling me to stop renting. They said they would need to inspect the house each time a new tenant started to rent. Once I called and made it clear that I was living there, everything was good. I looked at it like this. If you fell on hard times, are they really going to come after you for having a sibling or friend living with you helping to pay rent? No! Now if you are entering into contracts and charging deposits, you might have issues.
  • Member since 2018 · 17 posts · 3 votes
    7y

    Thank you very much for posting this I was not aware that there was these type of loans we so much restriction

  • Investor · Lake County, OH · Member since 2016 · 124 posts · 55 votes
    7y

    I have never heard of that either.  I will look for that in the future!  Could you take compensation for something other than rent?

  • RE Investor · Houston, TX · Member since 2016 · 11 posts · 5 votes
    7y
    @Samantha Miller if you did rent out a room I'm quite sure your Lender wouldn't pursue it as a violation, assuming they're receiving their payments on time. To pursue it would cost money.
  • Real Estate Agent · Phila, PA · Member since 2017 · 126 posts · 100 votes
    7y

    @Ann Shanley No problem! I'd hoped sharing this would be helpful for others. Unfortunately it's 2 issues in 1 - first there's the "no renting" language, then there's the "no other income earning adults living there" language. Therefore, even if I let someone else live there without paying "rent" and lets say, pay for groceries instead, I'd still be violating that second part (unless they earned no income, in which case they couldn't buy groceries lol). 

  • Investor · Alabaster, AL · Member since 2016 · 280 posts · 88 votes
    7y

    Those don’t have to be paying “ tenants”:). They’re just people that stopped by, decided to overstay and leave money on the kitchen counter every month out of guilt:). And a question please: What’s the penalty for violating that clause? You’re giving the lender and government too much credit: by the time you sign the loan, they have the next person’s appointment to sign another loan already underway. We are all just here to help keep the economy growing. I wouldn’t worry too much. That sentence “ no other income earning adults living there” is just absurd. So no one can live there with you even if they give you no financial compensation? Wow. Do as your conscience deems fit. There are multiple ways to “ skin a cat”. 

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

    @Christine Mwai I totally agree with you on the absurdity, and unlikeliness of getting "caught". Nonetheless, they do cite a $10,000 fine and/or 30 years imprisonment for mortgage fraud. They also say they can call the whole mortgage due. 

  • Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
    7y
    Originally posted by @Samantha Miller:

    @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.

    I would be tempted to push back on your mortgage broker who didnt put you into the loan you requested.  Especially if they knew you were planning on having a roommate, and you didnt know about the provision.

    If I were you , I would see if it was possible to move to a 5 or 10% down mortgage with PMI conventional mortgage and then have your roommate.

     Bottom line, I think the intent of the loan is to make sure you arent trying to circumvent the rules for higher income/non qualifying family members/spouses.  I really doubt they would come after you on this, but maybe wait a year and then rent out the rooms.

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

    @Bart H. Something I learned previously, and failed to apply in this scenario, is "if it's not in writing, it never happened". My lender and I definitely discussed this and I told him my plan to rent rooms from the beginning...but...over the phone. Sigh. Not in writing. Never happened. I have no argument at this point. I'm definitely hoping I can switch back to 5% or 10% at this point which I was more than happy to do from the start, but again the lender called one day and said "hey, i found 3% for you!" so I said "great, let's do that!". At that point, interest rates were lower. Now that they've spiked, my DTI ratios might preclude me despite putting more down. I will wait a year, and I still think it will be worth it. But definitely lessons learned = get everything in writing, and don't rely on others (including "professionals") to look out for your plans/goals/best interest.

  • Investor · Parma, OH · Member since 2016 · 101 posts · 46 votes
    7y

    @Samantha Miller Don't "rent a room", just "get a roommate".  Don't charge "rent".  Just have them pay for "utilities, groceries, lawn care, etc." 

    Also, I believe with most mortgages it's not about what you actually do with the property, it's about what you intend to do with the property as the time you close.  If circumstances change (like finding out that your plan is not allowed) you may be able to move out sooner.  I know I had a mortgage broker tell me when I was closing on a property that I intended to live in for 2 or 3 years (with roommates just like you) and then move out to rent the whole thing, he said as long as that was my plan now I could do owner occupant financing and if anything changed, I could move out without penalty (even in the first 6 months or year or whatever) as long as I didn't "plan" to do that all along.  How do they prove intent???  I have no idea. 

  • Mike HurneyPro Member
    Real Estate Investor · Boston, MA · Member since 2009 · 2k+ posts · 542 votes
    7y

    @Samantha Miller all you have to do is have a "roommate" or Tenant find out about this (google you or see this post on BP) and you'll forfeit any rent you've received.

    How do I know this?

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

    @Mike Hurney I'm not looking for tips about how to "get away with it". If it's something I wouldn't post on this forum for fear of someone "finding out", it's not something I want in my real estate strategy. I want to play by the rules, not look for tricks to get around them (unless they are legit/allowable tricks). Thanks!

Join the conversationCreate a free account to reply, vote on answers and follow this thread.