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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  • Member since 2018 · 1 post · 0 votes
    7y

    First of all congrats on buying a home. This is the beginning of a lot of opportunities for you and tax breaks on the interest also. 

    I'd rent out out rooms anyway. I doubt there will be any problems if you do. 

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

    @Christi Hawkins Looking at my loan kit, it says it's a conventional mortgage (in the section labelled "Loan Type" - the options are FHA, VA, conventional, USDA, and other - they have conventional checked off.) I didn't qualify for FHA because of their new regulations for how student loans are considered.

  • N Providence, RI · Member since 2017 · 2 posts · 0 votes
    7y
    @Samantha Miller I don’t see a bank calling in a loan (asking for their money back) over your renting rooms out. If the note is being paid you won’t hear from the bank. Good luck!
  • Stephanie MedellinBusiness Member
    Mortgage Broker · CA · Member since 2014 · 1k+ posts · 642 votes
    7y

    @Samantha Miller  If they fit under the income limits, then I don't see why you couldn't have roommates live there and chip in.  Maybe they won't technically be considered renters if it's done that way?  If they are friends and you know their names now, I doubt you'd have to update paperwork every time someone moved in or out.  It doesn't look like they would be borrowers on the loan, just household members listed on a form.  Have you tried asking the housing agency directly if renting applies to roommates living there with you?

    This is something (as a loan officer) that I would definitely read through before putting someone in a program like this.  It's really unfortunate that you're in this position.  

    As someone else said above, the difference in rate is probably small to switch programs.  The income from having roommates will more than offset the $20 or so more in a mortgage payment (depending on your loan amount) from taking a higher rate with a different loan.  I would switch loans if you don't feel comfortable being bound by these rules.  I wouldn't want to be!  The property cannot be rented as long as the loan is in effect.  Refinancing in the future will be more expensive than getting the right long term loan now.

    Stephanie Medellin, Loan Factory58 Reviews
  • Stephanie MedellinBusiness Member
    Mortgage Broker · CA · Member since 2014 · 1k+ posts · 642 votes
    7y

    Just read another post....I'm a little confused.  Is the whole loan being provided by this agency, or just down payment assistance?

    Stephanie Medellin, Loan Factory58 Reviews
  • Real Estate Agent · Phila, PA · Member since 2017 · 126 posts · 100 votes
    7y

    @Stephanie Medellin So if I understand it correctly, PHFA backs the conventional loan I am being offered, allowing them to have me put only 3% down.

  • Rental Property Investor · NY · Member since 2018 · 571 posts · 332 votes
    7y

    that's a pretty stupid rule.  renting out room = more money for you = more secure mortgage for the bank... very stupid of them... Sorry i'm not adding any value to this conversation but just wanted to say something haha.

  • Member since 2018 · 55 posts · 14 votes
    7y
    Originally posted by @Samantha Miller:
    @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.

     What can I say, I am just a romantic at heart.

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

    @Lee L. I admire that! Life can't just be all business all the time.

  • None · Member since 2018 · 125 posts · 46 votes
    7y
    @Samantha Miller I think some other people have said this, but you should try to AirBnB those extra rooms to try to offset some of your costs. Who knows maybe you can even make more in AirBnB than rent! Could be a blessing in disguise and I’m sure this post has really helped a lot of people (including myself!) know what to look out for. Thanks for posting and congratulations on making your first deal!
  • Real Estate Agent · Phila, PA · Member since 2017 · 126 posts · 100 votes
    7y

    @Account Closed Thank you so much, and I'm glad to think this post might help someone! A positive side.

  • Member since 2018 · 43 posts · 8 votes
    7y
    @Samantha Miller, that stinks. I’ve never heard of that condition. Guess it just goes to show that you really have to read the fine print just to make sure you know what you’re signing. Good luck in whatever you decide, Wish you the best and hope it still works out.
  • Member since 2018 · 7 posts · 2 votes
    7y

    Hi,

    Just tossing in my two cents, however, I had something similar but I was able to get a HELOC within 2 months of closing the first one. I did have to add some value to the location and I'm out in the Canton area. Go to a credit union and see if they'll let you. I was already with my credit union for a number of years before getting the loan though so not sure if that matters too.

    Here's hoping it works out for you.

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

    @Samantha Miller  Oh...too bad it's not as simple as dropping the down payment assistance.  :(

    Stephanie Medellin, Loan Factory58 Reviews
  • Developer · Point Pleasant Beach, NJ · Member since 2015 · 303 posts · 216 votes
    7y

    @Samantha Miller - I'm not licensed to practice law in PA but I can't imagine renting out the rooms in the house you live in would cause you any problems.  Many legal documents throw in every clause they can just to point to something if things go wrong.  This appears to be one such clause.  I highly doubt the bank would bring anyone to court or call a performing loan due because this clause was violated.  I would also think you would have a pretty good argument that you were using the house as a primary residence so what you did with other rooms is nobody's business besides your own.  Not that it would ever go to court, but if it did its hard to believe this clause would be upheld. 

  • Investor · Harrison, AR · Member since 2017 · 42 posts · 10 votes
    7y

    What I would do -  Is just not tell them. I have never had a bank come check out my property even if it is going through a remodel. 

    What you should do - Just go to another bank and be more clear about your intentions. Or less clear whichever you choose. 

    Good luck! 

  • Real Estate Agent · Austin, TX · Member since 2015 · 181 posts · 75 votes
    7y

    The PHFA sounds like a local governmental program that is backed by local bonds - maybe for affordable housing? Often times, the goal of these programs is to get people into housing that would not typically qualify for other loans.  With that goal in mind, they put restrictions on the living arrangement.  It is not for the purpose of generating income but a place to call home.  

    Can you qualify for a fannie/freddi FHA or conventional loan? Those do not restrict roommates.

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

    @Carrie Hiner You are right, that's likely the case. My student loans took me out of the running for FHA, and other low-down programs were tricky. However, I didn't necessarily need low-down, if it was going to mean restricting me from renting (again, the goal I expressed to my lender from the start). Sure, if I qualified (legitimately) for a low down, I was happy to take it. But I did not know or think that low-down (at least this particular low-down) would restrict me from my goal of renting. We got too far along in the closing process before they showed me this clause (in fact, they didn't really show me - I pointed it out). I think somewhere along the line, my lender thought I was insistent on low-down. I always said that would definitely be ideal if it works, but again had I known what I'd be giving up...

  • Realtor · Charleston, SC · Member since 2018 · 84 posts · 51 votes
    7y

    In my opinion, as long as you're paying your mortgage on time, the bank is not going to care who's living in your home. 

  • Real Estate Agent · Austin, TX · Member since 2015 · 181 posts · 75 votes
    7y

    @Samantha Miller You're on the right track.  This program won't work but I'm sure something will.  Keep saving, keep looking.  Owner occupying a home at a young age is always a great start in the real estate game.  Good luck in your adventure. 

  • Member since 2018 · 1 post · 0 votes
    7y
    @Jay Hinrichs. Correct. Also, their may be local statutes or ordInances prohibiting enforcement of this loan provision. Either a contract or real estate attorney privy to the local laws may be of assistance.
  • Lender · Los Angeles, CA · Member since 2018 · 95 posts · 16 votes
    7y

    Yes, those Owner Occupied Loans have a lot of restrictions because it's not made with the intention of letting consumers profit.  That's one of the reasons why they don't give loans to renters.  There are options out there that you can qualify for.

  • Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    7y

    so.....  my questions are: what is the penalty if one were to rent out a room/do Airbnb ? (fwiw I would not do Airbnb tho, as the info is public on the web and also you need to get permits which  again are public info which just leaves a paper trail  for any lender to find)...

    And, I would take my complaint to my lenders boss....  tell them that you were not informed etc and make a stink...  see if you have options....

    it is awesome that you are almost closing on your first home....  congrats on that!

  • Investor · Bellevue, WA · Member since 2016 · 10 posts · 2 votes
    7y

    It's important to read the whole agreement package (note and deed of trust) with the bank to understand exactly what it means before deciding.  Depending on how the document is written it could suggest that if you do a certain thing, then you are in immediate default and then it will list one or more remedies that happen automatically. Alternatively, it could say that by signing this document you agree to certain provisions, like not renting rooms.  Or it could not be in the form an agreement and it just says if a certain thing happens then the lender has the right to do certain things. That last approach is not the same as a promise or agreement on your part, and perhaps (depending on the language, etc.) its more of an articulation of cause and effect rather than agreement and default. In which case, its up to you if you want to face those consequences. In that case you have not done anything wrong by taking in tenants, just triggered a right on behalf of the bank. If the consequences are that the lender has the right to call the loan, you might conclude that they won't.  Also, i wonder how they would know that you had roommates. Normally if you pay on time, the lender doesn't look in the windows to check how many occupants.  Also normally no reporting requirements like copies of future tax returns, where they might see rental income from that address. I'm not a lawyer, just some things to look into. 

  • Christi HawkinsPro Member
    Columbus, OH · Member since 2017 · 237 posts · 142 votes
    7y

    @Samantha MillerSo I've looked at everything I can find and I am not an attorney but the PHFA/OHFA down payment assistance program is based on your income and they have limits on income depending on the area in which you live. I think that may be to what they are referring. There is probably a clause in your loan docs that say "this loan was provided based on the income figures you submitted. If your income significantly changes you have to let them know so they make sure you still qualify".  I certainly can't tell you what to do but things to consider; will the income you receive from renting out the bedrooms make you ineligible for the loan and/or will you be submitting this income on your tax returns as rental income.  

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