Getting a Primary Residence loan for Rental property

9 Replies

I plan to buy a rental property in a different state than where I currently live. This would be my first home and I don't own any homes and currently renting out the place I live in.

I am thinking of getting a Primary Residence loan instead of Investment loan due to the obvious low interest rates (2.65% vs 3.1%) but I am not sure of the implications and if it would be Ok to do so.

Would there be any tax related issues or insurance related issues if I take a Primary Residence loan for a place I would probably never live in?

Maddy there is no tax on a cash out refinance when you take out cash.  It's actually the best way to buy more real estate especially with rates being so low right now.  You can also write off more costs and deductions on the new property is you use it as a short term rental when you file your schedule E at the end of the tax year.  Let me know if you have any specific questions.

You’d have to change the mailing adress to which eve prison they send you to. 

When you get a primary loan you sign a piece of paper saying you will be occupying the property within 30-60 days and living there for at least 1 year. 

At least the trial won’t take long with you working, voting, and paying taxes in another state it won’t take long to prove you didn’t live there. They won’t even have to look at the fact that you purchased a landlord policy instead of a homeowners policy or that you’re paying non-homestead property taxes since there is zero chance you will convince a state you’re living in their state but you aren’t paying state income tax.

This has to be one of the worst planned crimes of all time. I understand the criminals that at least live in the same state and want to scam the banks to save a few thousand in interest. I mean how better to defraud the company that trusted you?

SMH. 

Hi @Maddy Jane welcome to BP! As was pointed out by another BP member, you can't get an owner-occupant (primary residence loan) if you are not actually an owner-occupant. Rather, you'd have to get a loan for an investment property. You can still do 30 year fixed and the closing wouldn't look all that different. Many lenders will require 15-20% down for a single family investment property and the rates for an investment property are a little higher. That said, if you are looking at a half point higher interest difference between the two loans, that really shouldn't make or break the deal. Investment loan interest rates in the 3's is still fantastic. It was only a few years ago I was paying 5%-5.5% interest.  

In short, I'd strongly recommend not trying to get a primary residence loan on an investment property because 1) the only real advantage is the down payment requirement and 2) you can certainly find yourself in hot water by not actually intending on living there

The reason primary residence (owner occupied) loans have better terms is to assist people in achieving owner occupied home ownership. Primary residence loans specifically state they are not for investors. 

The issues are as follows:

1. You will have to lie to your mortgage broker and tell them you are owner occupying. That means telling them you are moving out of state. They will want to know if you are moving for your job and if so are you going to work for the same company or a new company?

2. You will sign mortgage documents that state you will be owner occupying the property. You may also sign a state/county tax form that says this will be your primary residence. When signing contracts, lying for financial gain is fraud, which is criminal.

3. Most states offer homestead exemption that will give owner occupants a reduction in property taxes. Since you stated you will occupy the property, you will get that discount. That is tax fraud.

4. Since you are claiming this as your personal residence, you will need to use this as your tax address. That means notifying your company of change of address and using that as your payroll address. It means using that address as your primary residence for filing taxes. There could be ramification to state income tax by changing your primary residence. Are you going to register to vote in that state? Are you going to get a new drivers license and update your automobile registration? How do you keep tenants from opening your mail and make sure they forward to you? 

5. Since the rental property is actually now your personal address, you lose tax benefits of it being a rental property. You can't claim mortgage interest deduction on your primary residence. You lose depreciation, insurance and other deductions. You could lie and act like you live there, but rent out rooms. That would give you partial deduction. 

6. Your property insurance will be owner occupied. In the event of a catastrophic event like fire or injury on the property, the insurance company will interview you. You signed documents with them saying you were an owner occupant. When it comes out that you were not an occupant, the insurance company could deny the claim or pay the claim and pursue you legally for reimbursement. I had three fires in rental properties within my first three years in business, so it does happen.

I really question if you will come out ahead in the end. You are committing fraud and not even gaining that much. The 0.45% difference in interest will save you $450 per year on every $100,000 borrowed. You have to decide if it is worth it for that small amount of gain.

My advice in general for anyone entering business, including the rental property business, is follow laws and rules. Being dishonest and cutting corners in life is not creative or how successful people get ahead.

In order to qualify for a primary residence loan, you must occupy the property. Lenders do a lot of due diligence to make sure that you do actually intend to occupy before closing on the home (i.e. letter from employer verifying your plans to transfer, various background checks, etc.) It's actually considered mortgage fraud (felony) if you purchase a home on a primary residence loan without intending to live there. Not worth it. 

Everyone, thank you for the wonderful and detailed responses.

It all makes sense, except for the fact that if I take the loan as a Primary Residence but I treat it as an Investment property for tax purposes, half of the issues will be taken care of, right? Or am I still missing something?

Originally posted by @Maddy Jane :

I plan to buy a rental property in a different state than where I currently live. This would be my first home and I don't own any homes and currently renting out the place I live in.

I am thinking of getting a Primary Residence loan instead of Investment loan due to the obvious low interest rates (2.65% vs 3.1%) but I am not sure of the implications and if it would be Ok to do so.

Would there be any tax related issues or insurance related issues if I take a Primary Residence loan for a place I would probably never live in?

Hey Maddie

Welcome to BP

What you're considering would be mortgage fraud and it's a felony.  Yes, people do go to jail for it.  The way you are constructing it though, I don't think the loan would get out of the gates so you're probably good.

Best of luck though.

Stephanie

Originally posted by @Maddy Jane :

I am also being suggested by lenders to go for a Second Home Loan. Would that be a good idea?

Maybe, if it's going to be a second home.

If it's rented for a year and you're not going to use it, it's a rental and you need to go that route.  If it's going to be used as a 2nd home, then do that.  Skirting the guidelines to get a little better ltv or rate isn't a sound business practice.

Stephanie