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
422 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 Broker · Austin, TX · Member since 2012 · 1k+ posts · 1k+ votes
    7y

    @Michael Kiley I am going to carry wire cutters in my back pocket everyday to see what happens. Also, in Austin, Texas its legal for ladies to be going around topless according to my girlfriend. (It doesn't happen, btw). Rules are made to be broken...just kidding. 

  • Investor · Albany, NY · Member since 2014 · 129 posts · 28 votes
    7y

    Samantha, this was in my mortgage in New York decades ago.   I paid off my mortgage fast -- I could do that -- and then rented rooms and later the whole house.  My insurance co also said something about dogs AFTER I got one, and then said because I had one already it was okay.

  • Scott CheekPro Member
    Investor · Philadelphia, PA · Member since 2016 · 13 posts · 11 votes
    7y

    Samantha, would your prospective "roommates" be friends of yours?  Maybe they could send you monthly venmo payments for "cheesesteaks and crab fries."  Just kidding.  Curious to know which up and coming neighborhood you bought in?  Apologies if you already mentioned earlier in the thread.

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

    @Kate B. Wow - it's always something, isn't it!? Awesome that you could accelerate repayment and go on to rent!

    @Scott Cheek Haha. I'm buying in West Philadelphia. Not only do I keep hearing from various sources that there is great potential here, but I work/live in the area and I see it myself. The college town of UPenn (where I work and attend grad school) is expanding into the surrounding neighborhoods.

  • Scott CheekPro Member
    Investor · Philadelphia, PA · Member since 2016 · 13 posts · 11 votes
    7y

    I've heard the same from a friend of mine that lives there.  I plan to go scout out that area soon.  Congratulations and good luck!

  • Jordan MoorheadBusiness Member
    Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
    7y
    @Samantha Miller that’s pretty ridiculous. Are you going to be rehabbing the place or is it move in ready?
  • Real Estate Agent · Phila, PA · Member since 2017 · 126 posts · 100 votes
    7y

    @Scott Cheek Let me know what you think when you check it out! Feel free to reach out.

    @Jordan Moorhead Agreed. It is move in ready and looks pretty nice, but not brand new reno style. The current owners were pure investors who rented it out, so they made it nice enough for that purpose (and it's an old house, so it had some of that inherent charm) but since I'm not doing roommates when I buy as planned, it might be an opportunity for me to bring it up to par (DIY) with some of the other more renovated houses I've seen in the neighborhood that have sold for $50k more than what I am buying for.

  • Real Estate Broker · Charlotte, NC · Member since 2014 · 129 posts · 12 votes
    7y
    @Samantha Miller I say forget the fine print and proceed with your plan. At the end of the day, the banks just want to get paid. How are they going to oversee what you do in your home? Later for them.
  • Member since 2018 · 55 posts · 14 votes
    7y

    Ok, upon giving it a quick read through, it isn't like she couldn't move her sick mother in, but she can't rent a room to her sick mom. I can't imagine that having to list out the people who are living in the house immediately is BINDING in any way. What if she had a whirlwind romance and married someone six weeks after closing? Ofcourse her spouse could move in.

  • Mesa, AZ · Member since 2015 · 74 posts · 47 votes
    7y

    100% I would ignore this LOL... who is going to come inspect?

  • Real Estate Agent · Phila, PA · Member since 2017 · 126 posts · 100 votes
    7y
    @Lee L. Yes, the nutcase who reads the fine print in mortgage documents is definitely expecting a whirlwind romance sometime soon...hahahahaha!! But in all seriousness I agree with your point. If a legitimate circumstance change occurred, I think that’s one thing. Renting is just a separate issue.
  • Jordan MoorheadBusiness Member
    Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
    7y

    @Samantha Miller if you aren't comfortable renting it out and can still get into another one it may be worth telling them to keep the EM and moving on.

    If your mortgage is $1500 a month and your EM is $3000 you'll save that in two months if you can find a place with roommates.

    You could also find another mortgage with a slightly higher interest rate. If it makes your payment a bit higher, who cares? The roommates will be paying that or whoever you rent it to after you move.

  • Stephanie MedellinBusiness Member
    Mortgage Broker · CA · Member since 2014 · 1k+ posts · 642 votes
    7y

    @Samantha Miller  I only read through the first 2 pages, but it seems like you qualify for this down payment assistance by having a household income under a certain limit.  Bringing in other adult roommates with an income could push you over that limit, even if they aren't borrowers.  That's the only reason I can see for the restriction...

    Stephanie Medellin, Loan Factory58 Reviews
  • Rental Property Investor · Los Angeles, CA · Member since 2015 · 73 posts · 55 votes
    7y

    Definitely never heard of this before...Depending on the type of loan, I'd probably still rent out the rooms.

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

    @Stephanie Medellin I think you have a good point, I had the same thought. There's logic in that, but still makes it unfortunate that, even if I did find 2 roommates and all of us combined still fit under the income limits, I'd have to actually add those people to my mortgage documents. Then what if they move out in 3 months, and I find 2 new people - I have to call my bank and amend the documents every time?

  • Member since 2018 · 23 posts · 6 votes
    7y
    @Samantha Miller sleep easy. find a different product.
  • Investor · Ridgecrest, CA · Member since 2017 · 246 posts · 120 votes
    7y

    Wow that's a new one. I'm close to closing on a house that I plan to do pretty much the same thing. I like to call my strategy the Cold. Its a mixture of a house hack and a BRRRR strategy. I purchase the house as a primary residence and begin fixing it up. Once I get a couple of bedrooms, and bathroom, and the kitchen usable I plan on renting out a room hoping to get enough to pay the mortgage payment while I finish the repairs. After I finish the repairs and Ive lived in the house the required amount of time to establish it as your residence which is I believe usually six months and one day and move out and rent the whole house. Then I will get a heloc to pull out my equity that way I keep my low interest rate and payment. I will of course make sure I do everything legally.

  • Folsom, CA · Member since 2018 · 134 posts · 100 votes
    7y
    I would 100% rent out the other rooms. If you want to follow all the rules work a 9-5 forever!
  • Real Estate Agent · Renton, WA · Member since 2017 · 204 posts · 151 votes
    7y

    Congrats!

    I'm curious "What if you have someone living with you that is helping with groceries,utilities,cable,phone ect..  I'm sure that's not a crime ;)  Best wishes

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

    @Jeremy Blevins Curious - are you working a 9-5? And if not, how is it gong for you? If you haven't found a way to cleverly (not illegally, but using a combination of financial intelligence and hard work - note the difference) break from the 9-5, I might recommend spending a little more time on BP.  :)  Thanks!

  • Real Estate Agent · Oak Ridge, NC · Member since 2017 · 76 posts · 39 votes
    7y
    @Samantha Miller that's crazy! I would be tempted to "forget" that rule and see what happens. That said what if someone lives there with you "rent" free and they pay for other things like utilities, ins, etc?
  • Christi HawkinsPro Member
    Columbus, OH · Member since 2017 · 237 posts · 142 votes
    7y

    @Samantha Miller the only loan I can think of that doesn't allow any type of income to be produce by the property is a USDA loan. You mentioned yours is a PHFA and I'm assuming that stands for the Pennsylvania Housing Finance Agency, we have OHFA in Ohio. Here it's a down payment assistance grant which goes along with an FHA Mortgage to help with your down payment and/or closing costs. Is that the case in your situation?

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

    @Christi Hawkins That’s correct. Is there language about renting in the OHFA? I linked the PHFA document back in the original post - it pretty clearly restricts renting from how I read it - I haven’t been able to find an interpetation otherwise but if you know any differently please share! Thank you!

  • Tyler WarnePro Member
    Real Estate Broker · Helena, MT · Member since 2016 · 65 posts · 28 votes
    7y
    @Samantha Miller would it be possible to charge a fee for people to use the bathroom? Of course the room would be free as the the restrIction states. Market fees for bathroom use are similar to the prices people pay for a room, I hear.
  • Christi HawkinsPro Member
    Columbus, OH · Member since 2017 · 237 posts · 142 votes
    7y

    @Samantha Miller I'll get on their website and see what I can find out. I think you're situation is completely different from what they're trying to avoid You aren't really planning on turning it into an investment property your just taking advantage of the extra space and putting it to good use financially. But you never know how a government agency will interpret that Let's just assume it won't be in your favor and there is a chance they will catch you, I've seen it happen before. I've seen people get caught by changing their address at the post office. In those cases, they were trying to commit Mortgage fraud and rent out their primary residence. I know that's not what your trying to do. I'll let you if I find anything and just to clarify you are using the PHFA down payment assistance grant with an FHA loan, correct?

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