How to finance a rental ? "primary residence" rule enforced?

Question

Situation: All of my assets are now liquid. Currently renting myself. Looking to buy a primary residence and 1-2 income properties.

Because rates are so low, I would like to conventionally finance (20% down) a rental property, because this is the opportunity that has presented itself first.

If I declare investment as such my rate  is 4.5%

If I declare the investment as a primary residence my rate is 3.8%. Obviously, I'd like the lower rate.

Question:

What if I just take out a primary residence loan for a rental? Is this rule enforced? Will it become a problem if I try to take out another loan for my real primary residence?

Thanks in advance.

Bill Gulley · Answer

Yes it is enforced, you'll have at least two loan reviews after you make the loan, review means audit. What you're suggesting is mortgage fraud!

After a year of occupancy you can rent, if you can show good reason, like the loss of a job, you may obtain an exception.

Messing with banks and mortgage fraud can be orange jump suit time! :)

Mike Wood · Answer

@Devan Johnson You could lie about the first property, but you will be signing documents related to this being a primary residence at closing, so it is technically fraud.

The real problem I see is that you can not have two (2) mortgages that you claim are your primary residence. So if you buy your first property that is really an investment house, when you do find your actual primary residence, that will likely get hit with the higher rate.

I would be straight with the banks, and shop around if you don't like the rates. But based on what I am seeing, they sound right.  75% LTV is the max I can find on multifamily (2-4units), but I believe you can get 80% LTV on SFH.

Mindy Jensen · Answer

@Devan Johnson, you can get a residential loan for properties up to 4 units. FHA loans can be used on these properties, as well. You live in one and rent out the other 3. FHA can be obtained for as little as 3.5% down , although some sort of mortgage insurance would factor in.

Devan Johnson · Answer

Hark...I would buy my primary first, but that's not the opportunity that's presenting itself right now.

Devan Johnson · Answer

Thanks Bill. Duplex market is not great here unfortunately.

I guess as I think this through it doesn't matter when I purchase a rental (as long as it is declared an investment) as long as I have an adequate income to debt ratio. And if I put 25% down my rate goes to 4.25. So still worth pursing I think.

Bill Gulley · Answer

That's the game rules.

If you have a good duplex market, try that, rent the other side. You can do 1-4 units, problem is the appraisal finding comps of a 4 plex that is similar and meets appraisal requirements, that can be hard to do. Good luck :)

Devan Johnson · Answer

Thanks. So I'll conclude that the only real option at this point is primary residence first, wait a year, then rental property (at a much higher rate) later.

Jassem A. · Answer

You may want to own and live in the property at least a year first before applying for another mortgage.  It is tricky to obtain multiple FHA loans unless you are moving for your job or getting a bigger house. Another option is to buy a 2-4 unit building.

How to finance a rental ? "primary residence" rule enforced?

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