Lien holder won't allow property to be rental; Refi options?

Question

Hi everyone,

My wife and I are just getting into real estate investing. I have read Brandon Turner's book on Real Estate Investing and his book on Rental Property Management. We are moving in two weeks and want to use our current home as a rental rather than selling it. The problem is, our current lien holder does not allow the property to be used as a rental. We've talked to a bank, two mortgage lenders, and a credit union about refinancing and each of them have told us they require us to have in savings a reserve of 6 months of the mortgage payment, plus 2 months of payments for our primary residence (amounting to a little over $12k for our situation). They said this is standard among most lenders because Fannie Mae and Freddy Mac have set those rules. They also said they will scrutinize two months of bank statements to make sure there are no shady deposits or borrowing short term just to meet the requirement. We have about $4k right now and I calculate it will take us about 3 months to build up the rest. I don't like the idea of the house sitting vacant for 3 months while we wait for the refi. My questions are:

1. Would a private lender be a good option for the refinance?
2. Are there any options or recommendations I'm not seeing?
3. How would the current lien holder discover we're use the property as a rental? How likely is it they would find out?

Fred Shatzoff · Answer

Okay. Then if that what is says. Then do a cash out refi as an investment property. The lender is probably going to see that you have 3 months of reserves.

Fred Shatzoff · Answer

@Greg Morris If you get a loan with 3.5% that is FHA and must be owner occupied.

Fred Shatzoff · Answer

Let me ask you a question how long have you had the mortgage on your primary residence. Usually Fannie Mae says you must live in the house 1 year. After that you can usually rent it out. Did you call your lender and tell them you are moving? I would pull out my mortgage note and read it. If you go to a private lender they are probably going to want you to put the title in an llc.

Stephanie P. · Answer

@Eric Boring

You have a deed restriction preventing your from using your property as a rental, but for how long? Check your deed to see what the restriction is and for how long it lasts. Could be next year.

Refinance that loan as an owner occupied property to a loan that doesn't have a deed restriction and then, after the required period of time (if there is one in the deed), then move out and rent away.

Your homeowners will need to be switched to a fire and dwelling policy which will be sent to the lender, so follow the rules you agreed to in the deed for the new loan.

Stephanie

Eric Boring · Answer

We've lived here a little over 4 years. We haven't told the lender we're moving yet. We got our loan as a special "first time home buyer" loan that came with a second mortgage to make up what we were missing for the down payment. One of the stipulations was the property could not be used as a rental at any time. It was basically an FHA loan with extra rules added by the lender. I'll look at the note again to make sure I'm not misremembering anything. Thanks guys.

Greg Morris · Answer

I did not know that

Greg Morris · Answer

Eric, there seems to be a lot of control over house loans these days. You could rent it out but in time the lender will know. Home owner insurance informed me l had to occupy the house for coverage or l had to have rental insurance to rent. As soon as you get rental insurance your lender will know. Renting your house out without informing the insurance company may effect your coverage if something happened. Check with your insurance co. You can get a conventional loan with 3.5 down plus closing. Must have a good credit score and the income. If you tell them you want to make it into a rental most want to see some experience in renting out property in consideration for the loan. It's normal for a bank to want to see seasoned money. Unless you have to move l would stay in the house until your able to refi the loan into a rental property. Its all about money my friend.

Fred Shatzoff · Answer

Most investors who buy rental properties put the title in an LLC to protect themselves. There are also lender who have no limit to the amount of rentals you can own. If you have an LLC you can have your attorney or title do a quit claim deed.

Lien holder won't allow property to be rental; Refi options?

Lien holder won't allow property to be rental; Refi options?

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