Primary Residence to Investment Property

9 Replies

Hey guys, my wife and I are purchasing our first home. It is currently tenant occupied and we plan to let the tenants stay for 3-6 months after we close. We are also considering letting the tenants stay a full year because our current living situation is great and cheaper than what our monthly mortgage would be. 

Since we are receiving a residential loan from a bank, how would it work if we let the tenants stay a full year? I know the IRS requires you to stay in the home for the majority of a year to consider it your primary residence. Do we have to move into the home for tax purposes or could we continue to rent & hold this home as our primary? Would I need to refinance if we decided not to move into the home but keep renting it?

Any advice on this would be rock solid!

Is your loan FHA or conventional? If you don't move into an FHA home it could be considered mortgage fraud. Conventional loans typically don't have a requirement that you move into the property but if you were qualified on the assumption that you would sell your current home/ stop paying rent in your current home it could be a problem.

It will be spelled out in your mortgage documents, something like: "Owner must occupy the property within 60 days of Closing". This would be a problem if you are looking to have the property rented for more than 60 days.

At that point, you would be considered an investment property which is subject to different terms such as a significant increase in interest rate.

@Steve DellaPelle So I would have to be moved into the home by a certain date upon closing as part of the loan terms? 

If we were purchase and say a year down the road wanted to move out and get more tenants into the home would we have to refinance to an investment loan?

@Aaron K. It's a conventional loan. I told the loan agent the home was currently being rented and he didn't mention anything about a move in time frame. We planned to let them stay for 3-6 months to find a new place but they are good tenants and we are mainly purchasing as an investment just didn't want to get into a bank fraud issue

@Micah Carter I would talk to the lender as they will know their own policy much better than I will.  Given that it is a conventional loan, assuming they weren't counting on you moving from your current residence and thus reducing expenses it shouldn't be an issue.

@Micah Carter That would also be spelled out in your mortgage! So you have the 60 day time frame to move in and it may also have terms like "Owner must occupy as primary residence for at least 12 months".

My FHA loan had both of these terms. I am not 100% certain with your conventional loan but definitely worth checking in with your lender to find it out!

@Steve DellaPelle @Aaron K.  UPDATE. Spoke with the lender yesterday and they would require a 20% downpayment and it would change to an investment conventional loan. I was planning to use a first time home buyers loan to save cash for small renovations while the tenants were paying rent to cover the mortgage. So... great to know for the future when dealing with banks/lenders. 

We explained the situation the current owner and the negotiations started.

The owner was willing to provide seller financing so we are still moving forward. The seller financing may actually work out better for what we are trying to accomplish and much less of a downpayment. Thanks again for your input.