Renting out a house purchased for a primary residence

[Russell Jenkins]

Asking for a close relative.  They purchased a house several months ago with every intention of living there as a primary residence for years.  A few months later, life changed drastically due to an unexpected death and they no longer want to live there.  If they rent out the house, would there be consequences from the lender?  How does that work?

[Bill B.]

They will obviously find out. The property tax won’t be owner occupied if you have a local discount. The mailing address won’t be the property address. The checks will have a different address. And if all else fails. You’ll be changing the insurance from a homeowners policy to a landlord’s policy, because otherwise you would have zero insurance, and that’s not good. 

Will they care? Depends.

“Several months later” did they move in yet or have they never moved out of their original home? (They signed paperwork saying they would move in within 30 or 60 days.) if they moved in that’s a good sign, if they never even cancelled their old lease, packed up, rented a truck, less good. 

Why are they (hopefully) leaving the place? Are they leaving the state because of the death? Very reasonable. Or are they saying they’re not even going to leave their original housing (less reasonable) or they’re going to buy another local house? (Even less reasonable.) It’s highly doubtful they’d go after them for mortgage fraud on a first time thing, even if it involves a federal loan. MAYBE they’d call the loan due but even that is unlikely unless they showed no intent of moving in.)

TLDR: 95-99% chance nothing happens and they get away with it. Hopefully they moved in at least. They got a discounted interest rate and maybe a lower downpayment from the bank because they were going to live there. They could always get an investment loan to replace their current loan. That would be the “fair” thing to do. Luckily the bank is probably happy with the current interest rate they are collecting. (It’s not like you’re paying 3% instead of 6 or 7%.)

Good luck.