Can Renting A Property Violate Mortgage Terms?

Question

Jenifer Levini · Answer

Hi Michael A., I'm a lawyer in California and a long time ago I was a mortgage originator in New York. Thus, I have some insight into this from both perspectives.

Here's the deal. If you intend to use a property as a business, not owner occupied, then there will be a higher interest rate, and the underwriting guidelines will be different. Generally commercial property requites 20-50% down payment, and loan terms like amortization over 10-15 years. If you do the math this means your monthly payments will probably be double what they are for a residential mortgage.

At a bank there is no one who checks to see who is occupying a property. Once a loan is processed, and approved, then the next people who deal with it are the loan servicers who make sure your payments are received.

However, this only works once. Because you can only be occupying one property as your primary residence. If you go to buy a second property without selling the first one, the mortgage payments will be on your credit report. People's needs change and they decide to move. Banks understand this. Then it depends on the terms written into your loan agreement.  It is commonly known that people decide to move and rent out their primary residence. Then they buy a new home as their primary residence. These purchases should be separated by a year or two. If youre buying a lot of homes, such as a flipper, you cant get residential mortgages from banks. People who do this get private loans.

Joe Splitrock · Answer

Michael A. generally at the time you take out the loan, you will declare if it is owner occupied or not. The bank should be aware of your intentions when the loan is written. Interest rates are different for owner occupied versus renting in a conventional mortgage. Down payments can also differ for investment properties. If you misrepresent that you are owner occupying and then rent the property, you could be subject to fines or calling the loan. Usually after 12 months of owner occupied, you can change it to a rental and you are fine.

My advice would be to NOT misrepresent your intentions when securing the financing. I am not sure why the bank wasn't 100% explicit in their answer. Did you tell them you do not intend to occupy the property? You should have a clear yes or no if that is acceptable per the financing type you applied for. It almost sounds like you plan to claim owner occupied to get the loan and you are asking if you will get caught? If that is the question, the answer is no you should not do something illegal.

Carlos Rovira · Answer

Michael A. mentioned, it is hard to say whether it will get enforced or not if you are current on your payments.

Greg H. · Answer

The vast majority of loans are conforming loans such as FNMA,VA,FHA and USDA which do not have any restrictions against renting.  They may however, address your intent to owner occupy for 1 year.  Other non-conforming products from lenders may address this but it would be rare.

Are you looking to finance with less than 20% down for an investment property ?  Be upfront with your mortgage broker about your intent and see if they have a product that meets your needs

Colleen F. · Answer

As a second home you often have to sign that you don't intend to rent.  From time to time they audit this but not often.  Some lenders are pickier then others. We had one that we signed once in the documents  (and it was a second home), but they were fine with us eventually renting it. We had another in another state where there were 4 documents in the loan indicating it was not a rental that had to be signed and they also stated they audited. The loan officer was upfront and said he had had clients audited. We have never rented that house but we didn't intend to.  It really depends on the lender. Seeing the term in the loan makes me think your lender could be picky on this point at least in the near term.

Chris Mason · Answer

Most owner occupied loans make you state you intend to move in and live there for a year. After that, you're good.

One thing that can trip you up is local FTHB programs. Many of these, near me at least, will call the note/grant/whatever due if you convert it to a rental.

Paul Amegatcher · Answer

@Dave Toelkes thanks for the info.

Dave Toelkes · Answer

It depends upon when you convert the property to a rental.  Let's say you purchased with owner occupant financing, moved in and occupied the property as your primary residence for some period of time, then converted the property to a rental.  In this case, you probably have no problem.  FHA and VA loan usually have you sign a statement certifying that you intend to occupy the property as your primary residence at least 12 months after settlement.

If you move in, then get a job transfer two months later that requires you to move at least 50 miles away, then you should be able to convert the property to a rental with no lender issues.  This actually happened to me.  I purchased a home in TX with VA financing, then got military orders to transfer to MD six months later.  I converted to a rental and kept it in service as a rental for the next five years.

When I purchased my current primary residence 20 years ago, I told the lender that I wanted to purchase now but would not move in until after 12-18 months.  During that period of time, I intended to use the house as a rental until I moved in.  The lender had no problem with my plan and gave me a "second home" purchase money portfolio loan.

On the other hand, if you purchase with HUD owner-occupant financing, never move in, but instead put the property in service as a rental, you may get your loan called.  I have heard that there are HUD "inspectors" that do 30 to 60 day spot checks to confirm that the borrower is physically occupying the property.

@Paul Amegatcher

The lender is the mortgagee; the borrower is the mortgagor.