Legal repercussions of renting your primary residence

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Hi, I wanted to know what the legal repercussions are of renting a home that you bought as your primary residence. My mortgage says that if I do this I could be fined or even enprisoned for lying about the occupancy. Is this true? Does this ever happen?

This depends on how long you have had the current mortgage. Typically in the occupancy clause there is a 60 day to occupy and must reside there for 1 to 2 years. If you are outside of that then you have nothing to fear.

The imprisonment would come from fraud, where you knowingly and intentionally meant to deceive the lender and take this as a primary residence when your intent all along was to use it as an investment property.

Also you don't say whether you want to live there while you rent it which would not violate the clause.

The biggest issue you will likely encounter is the lender finds you renting prior to the clause time elapse and they call the loan due and you have to refinance into a NOO loan.

Well, I just got the mtge and have not lived in the home, but I realized that I could rent it for more than the mtge payment. So it makes sense for me to do that.

What do you mean by "Also you don't say whether you want to live there while you rent it which would not violate the clause."??

He means if you live in part of the house. Like if it is a duplex, or you rent rooms. If you just got the loan, and do not live in it, you will almost certainly be committing bank fraud. That can result in jail time.

Plus, look up the 50% rule for all the true costs of renting the home. You may think you will be making money while you will really lose money over time. Then look up the "horror" stories about bad tenants. Being a landlord is great when it works, and can be a serious disaster when it does not. Eyes Open!

Banks use the formula:

net rental income = (75% * rent) - piti

By that formula, you need the rent to be about one third more than PITI to be break even.

If you were to buy a house with an OO loan, live there for a few years then rent it out you're probably OK even though the loan was written as an OO loan. Investments loans will have additional clauses in them and will have a higher interest rate. I'm sure numerous people have claimed they're going to occupy a house when their real plan was to rent it right away. That's fraud, plain and simple. You're misrepresenting your intentions to the lender. Can you get away with it? Maybe. Will there be consequences if the lender finds out? Maybe.

If you do go down this route, be sure to change your insurance to landlord insurance rather than homeowners.

Originally posted by John D.:
Well, I just got the mtge and have not lived in the home, but I realized that I could rent it for more than the mtge payment. So it makes sense for me to do that.

John, Depending on the type of mortgage you received, you probably signed legal documents declaring your owner occupancy, so you can probably find them in your closing documents. They might mention how long you must live there, personally, or repercussions if you don't. And, yes, they do check if it is a new loan. My mortgage broker called me to let me know our FHA loan for the home we just bought 2 months ago for ourselves is under audit so more documentation might be requested, and my insurance carrier wanted verification that I moved in within 30 days of closing, so lots of people checking up on us to make sure we moved in. Never had that happen before.

Funny thing about mortgage fraud, the lender doesn't have to press charges, an FBI agent can just pick you up and drop you off at the local jail, the federal prosecuter can chage you and send you through the system. All loans are reviewed after closing. Spot audits are conducted. Lots of ways to find out your aren't there....I suggest you refinance now or live there. There is no problem if you are "renting" out a bedroom to a friend type of thing....

Fraud would imply that I had the intention of doing this the whole time and lied to the bank, which is not true. This almost completely subjective, unlike lying about your financial status which can definately be proven.

After the fact, the mortgage note says something like "you must live at the property for one year unless there are extenuating circimstances ora letter from the lender grants you permission to do so."

This seems very vague to me.

If you don't move in and you rent it, don't worry about proving your state of mind, the intent will be legally assumed and not in your favor. If, say 6 months later you needed to move to care for a family member for example, they'd let you out so to speak, everyone knows circumstances beyound your control can change and cause a hardship. Doesn't seem that's the case here, and I find it hard to believe too that you had a blinding flash of renting it while applying for an owner occupied loan, but I could be wrong, just hard to beleive....

@Bill Gulley mortgage fraud would have been hard to prove. I only moved do to a job promotion. The lender was notified of my address change.

As I noted above, "being forced to refinance was no fun." That was taken care of at the time. I only shared my personal experience for the benefit of the OP and possibly others as testimony that in fact loans are called for non-compliance with occupancy clause.

Also, aside from the mortgage issue, I don't know what state you live in, but if your state gives you a homestead exemption on your property taxes for your primary residence, the county may require you to notify them if part of the premises are being rented out to someone so that they can adjust the exemption amount. However I'm sure people do this all the time without notifying them.

Originally posted by John D.:
Fraud would imply that I had the intention of doing this the whole time and lied to the bank, which is not true. This almost completely subjective, unlike lying about your financial status which can definately be proven.

After the fact, the mortgage note says something like "you must live at the property for one year unless there are extenuating circimstances ora letter from the lender grants you permission to do so."

This seems very vague to me.

Your contention is completely groundless. OO homes you MUST live there. Not intending to is no, for many reasons. You signed documents to this fact, so you are totally obligated and have no defense. Ignorance (as always) is never an excuse, and you need to be pretty ignorant to not know you have to live in it when mortgaged this way.

Originally posted by Jon Holdman:
Banks use the formula:

net rental income = (75% * rent) - piti

By that formula, you need the rent to be about one third more than PITI to be break even.

If you were to buy a house with an OO loan, live there for a few years then rent it out you're probably OK even though the loan was written as an OO loan. Investments loans will have additional clauses in them and will have a higher interest rate. I'm sure numerous people have claimed they're going to occupy a house when their real plan was to rent it right away. That's fraud, plain and simple. You're misrepresenting your intentions to the lender. Can you get away with it? Maybe. Will there be consequences if the lender finds out? Maybe.

If you do go down this route, be sure to change your insurance to landlord insurance rather than homeowners.

Does the insurance company notify the lender if the owner switches to a dwelling fire policy? (I seem to remember that the insurance carrier does make contact if the name of the person on the policy changes).

If so, you would be taking the chance of the lender finding out, or taking a chance on the insurance not paying out if something happens with a renter and it's still on an OO policy.

I have a feeling this will be a much bigger issue once the interest rates start going up and mortgage companies want to get out of these lower interest rate mortgages that are locked in for 30 years.

At least try to get below 80-75% LTV so if something happens, you can quickly refinance the loan. I have a property that is owner occupied financing but I did live in the property for over a year and I am around 65% LTV so if anything happened, I could quickly refinance if need be. Heck, if these interest rates continue at this trajectory, I might be refinancing again anyway.

The best route would to be upfront and honest with your mortgage banker even if your situation changes.

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