Buying as owner occupied and renting it out?

Question

Hi All,

scenario: what if I buy a triplex or four plex as my primary residence with the intention of occupying one of the units therefore putting a lower down payment etc. but what if I don't like it and change my mind after a month or two and decide to rent out that unit, will I have to pay a penalty? What's the consequences? Would I have to declare it as a rental then? Any advice would be appreciate it. Thanks

Kevin Romines · Answer

I can understand your wanting to get a rental property for a low down payment and then converting it 100% to a rental property, but as you described it, if it wasn't authorized in advance by the lender, I wouldn't pursue it? That said, I was an 18 year vet of the mortgage industry before I made the change to insurance in the last 5 years. At the time that I was last in the industry, the requirement via the loan documents for an owner occupied property was that it must remain owner occupied for 1 year. After the 1st year, you were free to rent it out.

Most lenders will allow you a hardship change of status if something unforeseen and unchangeable were to happen within the 1st year. That means that you have to communicate with them about the situation and get their authorization. They do have means of checking and they in fact check to assure that you are owner occupied. In the worst case scenario, they could call the loan due as payable in full and start foreclosure proceedings. They could recommend that you be prosecuted for loan fraud? Would that happen? No one can say with any accuracy, but its the kind of thing you really don't want to mess with. Right now its an ethical question, down the road it could be a legal question?

My suggestion is ride out the 1st year and then rent it out and then go take out another 4-plex loan and do it all over again. If you want to get a rental with no money out of pocket, that can be done as well through a hard money lender that will lend 100% of acquisition and rehab if you are able to buy the property at a low enough price and they use the ARV method of looking at things? Then once you are done with the rehab, refinance it to a Fannie / Freddie without mortgage insurance and do it all over again. Not a single time will you need to owner occupy the property. There are lenders that will do this if you know where to look.

Decide, what is it that you truly want, then set about finding your answers and lenders and parties needed to make that happen, all above board and without getting into ethical, moral or legal questions.

Jerry Padilla · Answer

Akram A.

I would just live there for the year unless there is a major life event that changes your situation. The bank will know if you are not living in the property as they send your bill statements to your place of address. It is more of an ethical issue. There are rules and requirements for you to live in the property as FHA is designed for a primary residence, not a cheap way to get an investment property. I haven't heard of anything ever happening to someone, but I am sure there could be legal ramifications if you don't abide. If the bank pursues, them - I haven't heard of it - although that doesn't mean it hasn't ever happened.

Anthony Angotti · Answer

Just check with your lender, but my advice would be to just stick it out and then move after your time commitment has expired. Things are cleaner that way and you don't get involved in legal mumbo jumbo.

Akram A. · Answer

thank you for your detailed response. My wife is on mat leave so the plan is to move in for a year or so, but i wanted to know what to do if our circumstances changed within that time frame (ie: my wife is unhappy in the property,etc)

Buying as owner occupied and renting it out?

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