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
413 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 Agent · Phila, PA · Member since 2017 · 126 posts · 100 votes
    7y

    @Christi Hawkins Thank you so much for looking into this for me!! I greatly appreciate it! Yes I believe you are correct, there is a clause saying something to that effect. Interestingly, the income limits are pretty high in this program. $104k for 1-2 people, $122k for 3+, would still qualify. Even with the rental income, I would personally still be well below the limit. (Although perhaps they would be considering the combined income of the roommates themselves, not just mine). However, there is a separate clause within that same document, in a totally separate and unrelated section, that just states "rental of any portion is not allowed". So I am not sure if, even with keeping in line with the income limits, I can get around that blunt language that just says no renting period. Unless there is some commonly accepted definition of the word "renting" in this context such that it means "renting while not owner occupying" - but I do not find that language in the document, and they do not define their terms. Of course it does say it must be your primary residence, but it doesn't saying having it as your primary gets you an exclusion to the no renting. :(

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

    I am brand new commenting/reading on this web page.  I am in the learning curve right now--enjoying eavesdropping! I am buying my first "second house" by pulling money out of my paid off house to buy the house next door before it goes on the market. So my advice may not be worth anything, I just know what I would be tempted to do.

    I think @Mary Mitchell is on to something important. You know you told them about intending to rent. I wonder what kind of commission your agent gets out of this? Will your agent do this to someone else? If I was you I would be so angry I would want justice, damn the torpedoes, eeff this.

    Complain on up the chain.  Make a big noise.  If you think I am right about this, let them know that you think your agent willfully exploited you for personal gain (I assume there is personal gain somewhere in this) trapping you in this situation. Disclosure is such a big deal right now, I have signed all kinds of things (Look how much interest you are going to pay for this loan, ok I see, yeah, I promise I am not a terrorist, honest, e-sign here please). Your agent did not disclose this to you about the roommates and you know you told them. Sure it is a she said/she said. This agent could do this to someone else. Maybe already has... She is the one committing fraud, not you, by letting you get trapped in this arrangement. If you don't get satisfaction, get on twitter and other social media beyond this platform, and sing loud and clearly about who this company is, who these people are, and what exactly they did and warn other people not to do business with them. Better business bureau? Maybe a nice human interest news article about how loan agents are using government programs to corner borrowers into spending their money and then disclosing the details of the deal when you are in too far to get out. Don't exaggerate, of course don't lie. Tell the deadly honest truth concisely.

    To me, they are exploiting your desperation and newbie-ness. 

    My hope is at some point they let you out of this deal and give you back whatever money you have sunk into it, just to shut you up. And actually, trying to stop this person from making this mistake/exploiting newbies is the right thing to do. You know what you told them.  What happened to you is wrong. Best to nuke em' from orbit, it is the only way to be sure. 

    The bottom line? Because you plan to have roommates, YOU DON'T QUALIFY FOR THIS LOAN, NEVER DID, AND SHOULD NOT BE RAILROADED INTO THIS DEAL.

    Good luck and best wishes. 

  • Member since 2017 · 20 posts · 7 votes
    7y

    @Samantha Miller Maybe you could allow them to stay in the room for free, but maybe they are required to pay for the electrical bill/cable/internet/groceries/etc.. That doesn't sound like you're renting out the property to me, just being generous to your friends and they're reciprocating with contributing to other necessary bills...

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

    @Samantha Miller   If you were planning to have your mother live with you, yes her income would need to be included to make sure you qualify. I think its a very fine line regarding the income of those who will rent from you. Until it happens you don't know if they will be permanent renters or once you do it you may hate it and decide you want to live by yourself.  If I were your lender and you had these very real concerns I would make a phone to whomever will be servicing your loan and just ask the question. This is what she's planning to do at some point during her loan and see what they say. I applaud you for taking this so seriously and doing your due diligence but I think its time for your lender to end the debate once and for all and that takes a simple phone call Good Luck and please let us know how this turns out We've all learned some lessons from your question

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

    @Christi Hawkins You're right, I can always ask and just see what they say, you never know! And thank you again for the suggestion and encouragement. I will definitely post an update! And I'm so glad to know that this thread might be helpful to others!

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

    @Samantha Miller  And just to be sure, get any clarifications in writing!!  :)

    On a side note, did anyone else find it offensive that they are asking about whether you're pregnant, and requiring a letter from a physician?!  That is definitely a first and seems outrageous to me.  Isn't that a fair housing violation / medical privacy law violation / discrimination?  Especially when it says that an unborn child cannot be used to increase the income limit on at least one of the programs.  So what is the point of asking?

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

    @Stephanie Medellin I saw that as well and also thought that was really strange!!!

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

    @Samantha Miller @Stephanie Medellin  That is incredibly strange and has no place in the conversation. If I remember correctly you aren't allowed to out right ask a woman if she is receiving alimony or child support. Obviously, you need to know and you find out in other ways but you can't just ask the question and I would think this would apply as well. 

  • Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
    7y
    Originally posted by @Stephanie Medellin:

    @Samantha Miller  And just to be sure, get any clarifications in writing!!  :)

    On a side note, did anyone else find it offensive that they are asking about whether you're pregnant, and requiring a letter from a physician?!  That is definitely a first and seems outrageous to me.  Isn't that a fair housing violation / medical privacy law violation / discrimination?  Especially when it says that an unborn child cannot be used to increase the income limit on at least one of the programs.  So what is the point of asking?

     I'd imagine it'd be documentation for a child that's born prior to closing? I'd assume underwriting needs a way to document the growth in household...

    I only say this because of the lengthy explanations I had to write about a transaction. Basically I got some money deposited into checking, then moved same ammount to savings, then same ammount back to checking, then repaid the original lender. Again, each transaction same dollar ammount. You'd figure one letter describing in more detail with check numbers etc would suffice...nope it was one letter for "each" transaction and then another letter from the lender confirming they received payment.  You'd of thought I was doing my thesis on this by time I was done "explaining " it ...

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

    @Christi Hawkins UPDATE! I spoke with my lender one last time and really pushed on this issue. Timelines were tight, but....success! By putting an extra 4% down (in addition to the current 3%) and switching to a different loan product (Fannie Mae HomeReady) I was able to get myself out of the restrictive language in the PHFA affidavit! The extra down is totally worth it. Thanks to everyone on this thread for your replies/suggestions!!!! Sometimes things do work out if you just ask!

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

    @Samantha Miller Congratulations!!!! 

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

    ANOTHER UPDATE: Well, after all the work removing the restrictive "non-rental" language from the mortgage documents (see OG post and UPDATE post), another set of documents snuck up on me before closing. Throughout this process, I was planning to use an employee benefits program which would provide a $7500 "forgiveable loan" (does not need to be repaid if I stay in the property 5 years) to use towards down payment. What I didn't know (until 3 days before closing) was that this forgiveable loan would come with a set of "deed restrictions" that had their own non-rental language! At 3 days to closing, I had already spent about $6k between earnest deposits, appraisal, and inspections. ($6k that took me almost a year to save up between my main job and several side jobs.) Realizing I would not be able to get that money back if I walked away and feeling the stress and pressure to make this deal work - I went forward with the purchase. It's been 4 months since settlement, and of course in hindsight I realize (lessons learned>>) that worse things could happen than loosing $6k in a deal gone wrong, that I could have maybe tried harder to find a way out, and that decisions should not be made under pressure when avoidable. Granted - this property is in an up-and-coming neighborhood, where renovated/updated properties are selling for 50-60% more than what I paid for mine, so there still may be an upside in the long-run. However, I just wanted to share this second update as an extra warning to read everything and look out for 1) non-rental language and 2) deed restrictions! 

  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    7y

    Were the 'new' rental restrictions similar to the first set?  I find it odd that they can deny other income earning adults (or however they worded it) from living, not renting, in your house.  What if your boyfriend wants to move in or a family member?  

    Five years is a long time for a $7500 forgivable loan.  Hindsight is great, but it might have been easier to not use that and get rent for 5 years.

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

    @Theresa Harris The new restrictions state that the home must only be used as a "single family" home, defined in their terms as either an individual or a group of individuals related by blood, marriage, adoption, fostering, civil union, domestic partner, or other "parental or connubial relationship". So a boyfriend or a family member would be fine, but my original goal (before accepting these restrictions) had been to rent spare rooms to other unrelated adults (no more than 2 others, as per city zoning rules). 

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

    @Theresa Harris The new restrictions state that the home must only be used as a "single family" home, defined in their terms as either an individual or a group of individuals related by blood, marriage, adoption, fostering, civil union, domestic partner, or other "parental or connubial relationship". So a boyfriend or a family member would be fine, but my original goal (before accepting these restrictions) had been to rent spare rooms to other unrelated adults (no more than 2 others, as per city zoning rules). 

     I would push forward and ignore the restrictions.  My sense is they are trying to keep you from getting into a non owner occupied situation.  At the very least I would deliver pizzas to pay of the extra loan, and then go from there.

    Do you have a 401K?  if so can you take out a loan on it?  Those loans do not change your D/I levels for qualifying for a loan.

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

    @Bart H. Thank you for your suggestion! Interestingly, paying off the loan doesn’t help me. The restrictions “run with the land” forever, attached to the deed. Definitely something to look out for, for anyone else reading this! 

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