Buying a Primary Residence but with Leases in Place

[Vickie Liu]

Hi BP experts,

I'm looking to house hack in the greater Boston area by buying a 2-family property, using one unit as a primary residence and another unit for rental. I saw a good candidate but the problem is there're already 2 leases in place till 8/31/2023, which is 9 months away from now. I'm personally ok (even preferred to, it fits my timeline better) to move in by then. It seems tricky to the lenders due to the "you have to move in within 60(or 90) days of closing to call it a primary residence" rule. 

I talked to two lenders, one seems relaxed and saying if I can have an written agreement with the current tenants saying "they won't renew the lease" and, even better, with another agreement to lease out my current condo indicating I'm moving, they will take it as primary residence. The other lender seems strict about this but they have better rate... what are the more common practice for lenders?

I understand mortgage fraud is illegal ... but in my case, it will just be another 3-4 months with tenant in place to pay some rents and for me to get ready to move. Eventually I will move in and truly use it as primary residence. What's the odd this get caught? How serious will the consequences be? If this is not feasible, of course I will go ahead and  seek a way to break the lease but just want to learn from your experience. 

Thank you in advance!

[Sebastian Marroquin]

In my experience, the lender has said NO 100% of the time. If a lender goes to their supervisors and says it is ok, I would put it in writing so that you are cover in the event that the stars align and someone checks up on you. 

It is not worth it to go to jail or have hefty fines or court dates for a couple of dollars savings in your payment… 

Most of the time when you talk to a "lender" they do not know much of the law themselves, and they will go to supervisor  for clarity. 

So be careful who you are getting advise from. If you really want to buy this property and there are no other choices, and this is a great deal you cannot pass up… I would talk to a Real Estate attorney and maybe even your tax professional. They will let you know what you can and cannot do in your state. 

A lender once told me that it comes down to "intent" 

Do you truly intend to use the property as a primary residence? or not? 

It would be different if one of the units were vacant and then 'life changed' for you right after closing escrow and then you had to turn the primary into an investment home. 

What if you : delayed escrow and closed in 90 days and then once you close escrow - you waited another 90 days that the lender allows. 

You could lock in the interest rate for 90 days while you buy it: 

that is 6 months there. :) 

If you decide to do the 3 month escrow plus the 90 wait suggestion : let me know if you need a lender referral 

[Bill Brandt]

I predict you agree, put in an offer, get all the way to underwriting and they hand you a form saying you plan to move in within 60-9p days or you can have an investor loan at a higher interest rate with a bigger downpayment. Now that closing is 15 days away what are you going to do? You’re going to give them more money or you’re going to lose the deal, maybe not your earnest deposit, but your appraisal, inspection and whatever else you’ve spent. 

I’ve NEVER heard of any lender being lenient on this. If they are selling the loan like most lenders it’s not their call.

If it’s a super sweet way below market deal you either get the investor loan and then refinance after you move in, or you pay a tenant $5-$10k to leave early. If it’s just an every day deal you either pass or maybe give the seller $5-$10k for the option to buy it in 7 months with the understanding one side won’t renew, or 10 months with one side empty. Seller gets rental income until then and then either the sale they wanted at the price they wanted, or your $5-10k. Unless they’re afraid it will fall more than that and you’ll bail, it’s a win for you both. 

[Nicholas Coulter]

@Vickie Liu is there any chance you can speak with the tenants and do a cash for keys agreement? Maybe you pay them their first months rent in a new place and also pay to move their stuff? Could be a solution to your problem

[Kyle Curtin]

Quote from @Vickie Liu:

Hi BP experts,

I'm looking to house hack in the greater Boston area by buying a 2-family property, using one unit as a primary residence and another unit for rental. I saw a good candidate but the problem is there're already 2 leases in place till 8/31/2023, which is 9 months away from now. I'm personally ok (even preferred to, it fits my timeline better) to move in by then. It seems tricky to the lenders due to the "you have to move in within 60(or 90) days of closing to call it a primary residence" rule. 

I talked to two lenders, one seems relaxed and saying if I can have an written agreement with the current tenants saying "they won't renew the lease" and, even better, with another agreement to lease out my current condo indicating I'm moving, they will take it as primary residence. The other lender seems strict about this but they have better rate... what are the more common practice for lenders?

I understand mortgage fraud is illegal ... but in my case, it will just be another 3-4 months with tenant in place to pay some rents and for me to get ready to move. Eventually I will move in and truly use it as primary residence. What's the odd this get caught? How serious will the consequences be? If this is not feasible, of course I will go ahead and  seek a way to break the lease but just want to learn from your experience. 

Thank you in advance!

Hi Vickie! Depending on the financing that you are looking to use (low down payment loans like FHA or 5% conventional etc. especially) This is nothing to be worried about. What I have experienced before with one of my past clients, your lender will simply require you to serve a 30 day notice to quit to one of those current tenants prior to closing (you get to choose :) ), and show the bank proof that you did this with the intent to owner occupy. You must be able to show the bank that you are doing all that you can to try to satisfy the mortgage requirements if they ask. I have not heard of the bank asking after showing them the initial start to the eviction, but they are always able to if they would like to. You can only do what you can do, especially in our lovely very tenant friendly Massachusetts :) I also would highly recommend finding a lender that is very well versed with small local multifamily in our area, because they do not sound too familiar if they are on the fence about this one. I have multiple lenders that I am more than happy to send you if you would like! Good luck!

[Lien Vuong]

The bank wont underwrite you as a owner occ borrower with leases in place, in fact, the conditions today now require for you to serve the tenants with a Notice to Quit even if they were month to month tenants prior to closing. That contingency as not mandatory prior to this year. 

[Vickie Liu]

Quote from @Lien Vuong:

The bank wont underwrite you as a owner occ borrower with leases in place, in fact, the conditions today now require for you to serve the tenants with a Notice to Quit even if they were month to month tenants prior to closing. That contingency as not mandatory prior to this year. 

Thanks for the reply! Can you elaborate on the Notice to Quit a bit more? As Kyle also mentioned this above, I or the seller can certainly serve that, what if they refuse to comply?
That actually arose another question - if I write in the offer with contingency that that unit need to be delivered vacant, does that mean it’s no longer my problem but the seller’s if they want to take the deal?

[Vickie Liu]

Quote from @Kyle Curtin:

Quote from @Vickie Liu:

Hi BP experts,

I'm looking to house hack in the greater Boston area by buying a 2-family property, using one unit as a primary residence and another unit for rental. I saw a good candidate but the problem is there're already 2 leases in place till 8/31/2023, which is 9 months away from now. I'm personally ok (even preferred to, it fits my timeline better) to move in by then. It seems tricky to the lenders due to the "you have to move in within 60(or 90) days of closing to call it a primary residence" rule. 

I talked to two lenders, one seems relaxed and saying if I can have an written agreement with the current tenants saying "they won't renew the lease" and, even better, with another agreement to lease out my current condo indicating I'm moving, they will take it as primary residence. The other lender seems strict about this but they have better rate... what are the more common practice for lenders?

I understand mortgage fraud is illegal ... but in my case, it will just be another 3-4 months with tenant in place to pay some rents and for me to get ready to move. Eventually I will move in and truly use it as primary residence. What's the odd this get caught? How serious will the consequences be? If this is not feasible, of course I will go ahead and  seek a way to break the lease but just want to learn from your experience. 

Thank you in advance!

Hi Vickie! Depending on the financing that you are looking to use (low down payment loans like FHA or 5% conventional etc. especially) This is nothing to be worried about. What I have experienced before with one of my past clients, your lender will simply require you to serve a 30 day notice to quit to one of those current tenants prior to closing (you get to choose :) ), and show the bank proof that you did this with the intent to owner occupy. You must be able to show the bank that you are doing all that you can to try to satisfy the mortgage requirements if they ask. I have not heard of the bank asking after showing them the initial start to the eviction, but they are always able to if they would like to. You can only do what you can do, especially in our lovely very tenant friendly Massachusetts :) I also would highly recommend finding a lender that is very well versed with small local multifamily in our area, because they do not sound too familiar if they are on the fence about this one. I have multiple lenders that I am more than happy to send you if you would like! Good luck!

Thanks Kyle for the insight! Yeah I def want to talk to more local lenders that have more experience in this kinda situation. Please feel free to PM me some referrals! Thank you!

[Vickie Liu]

Quote from @Sebastian Marroquin:

In my experience, the lender has said NO 100% of the time. If a lender goes to their supervisors and says it is ok, I would put it in writing so that you are cover in the event that the stars align and someone checks up on you. 

It is not worth it to go to jail or have hefty fines or court dates for a couple of dollars savings in your payment… 

Most of the time when you talk to a "lender" they do not know much of the law themselves, and they will go to supervisor  for clarity. 

So be careful who you are getting advise from. If you really want to buy this property and there are no other choices, and this is a great deal you cannot pass up… I would talk to a Real Estate attorney and maybe even your tax professional. They will let you know what you can and cannot do in your state. 

A lender once told me that it comes down to "intent" 

Do you truly intend to use the property as a primary residence? or not? 

It would be different if one of the units were vacant and then 'life changed' for you right after closing escrow and then you had to turn the primary into an investment home. 

What if you : delayed escrow and closed in 90 days and then once you close escrow - you waited another 90 days that the lender allows. 

You could lock in the interest rate for 90 days while you buy it: 

that is 6 months there. :) 

If you decide to do the 3 month escrow plus the 90 wait suggestion : let me know if you need a lender referral 

Thanks Sebastian! Some good advice there! Yes I def should talk to a RE attorney for more information!
Both lenders I talked to have only 30-60 days of rate locking time. If you’re local to Boston I’d like to get more lender referrals.

Btw - the 6-month strategy you talked about - say I lock rate today for 90 days, and I go apply the loan at day 89. Then scheduled to close at day 180. Is that how it works? I thought the rate lock starts only when you apply a loan … still new to this here

[Vickie Liu]

Quote from @Nicholas Coulter:

@Vickie Liu is there any chance you can speak with the tenants and do a cash for keys agreement? Maybe you pay them their first months rent in a new place and also pay to move their stuff? Could be a solution to your problem

Yes those are def my first attempts. Just want to seek some experience here if all that failed, what my options are :)

[Vickie Liu]

Quote from @Bill Brandt:

I predict you agree, put in an offer, get all the way to underwriting and they hand you a form saying you plan to move in within 60-9p days or you can have an investor loan at a higher interest rate with a bigger downpayment. Now that closing is 15 days away what are you going to do? You’re going to give them more money or you’re going to lose the deal, maybe not your earnest deposit, but your appraisal, inspection and whatever else you’ve spent. 

I’ve NEVER heard of any lender being lenient on this. If they are selling the loan like most lenders it’s not their call.

If it’s a super sweet way below market deal you either get the investor loan and then refinance after you move in, or you pay a tenant $5-$10k to leave early. If it’s just an every day deal you either pass or maybe give the seller $5-$10k for the option to buy it in 7 months with the understanding one side won’t renew, or 10 months with one side empty. Seller gets rental income until then and then either the sale they wanted at the price they wanted, or your $5-10k. Unless they’re afraid it will fall more than that and you’ll bail, it’s a win for you both. 

 Thanks Bill! I guess the only risk for the delayed deal date would be I might face a climbed interest rate but it’s hard to tell these days. Def something to consider!

[Lien Vuong]

Only seller can issue because it has to be done prior to close and you do not have possession of the property yet. There's an inherent risk that they dont comply and you have to go through the formal eviction process. Yes, you can write that as part of your contingency. 

[Bill Brandt]

just a hint for the future…

you can say thanks @Vickie Liu  in one sentence. 
. 
good idea @user2 in the second sentence 

I think I’ll do that @user3 in the third. 
 
that way you don’t have to make 3 posts. :-)

[Sebastian Marroquin]

Quote from @Lien Vuong:

Only seller can issue because it has to be done prior to close and you do not have possession of the property yet. There's an inherent risk that they dont comply and you have to go through the formal eviction process. Yes, you can write that as part of your contingency. 

and you could put a seller hold back of funds in place : for an amount that is reasonable incase you have to go through and eviction! (we usually do about $20k to $25k hold back) : seller would have to agree to terms 

[Sebastian Marroquin]

Quote from @Vickie Liu:

Quote from @Bill Brandt:

I predict you agree, put in an offer, get all the way to underwriting and they hand you a form saying you plan to move in within 60-9p days or you can have an investor loan at a higher interest rate with a bigger downpayment. Now that closing is 15 days away what are you going to do? You’re going to give them more money or you’re going to lose the deal, maybe not your earnest deposit, but your appraisal, inspection and whatever else you’ve spent. 

I’ve NEVER heard of any lender being lenient on this. If they are selling the loan like most lenders it’s not their call.

If it’s a super sweet way below market deal you either get the investor loan and then refinance after you move in, or you pay a tenant $5-$10k to leave early. If it’s just an every day deal you either pass or maybe give the seller $5-$10k for the option to buy it in 7 months with the understanding one side won’t renew, or 10 months with one side empty. Seller gets rental income until then and then either the sale they wanted at the price they wanted, or your $5-10k. Unless they’re afraid it will fall more than that and you’ll bail, it’s a win for you both. 

 Thanks Bill! I guess the only risk for the delayed deal date would be I might face a climbed interest rate but it’s hard to tell these days. Def something to consider!

You can do a delayed escrow also like mentioned : and do a 3/2/1 lender buy down (you can ask seller to pay for it) since not many people will want to take on their tenants (the 3-2-1 buy down will have your payment be 3% lower than the current rate in the first year | 2% in the second year and 1% in the 3rd year : 4th year to 30 years normal current rate unless you refinance in the first 3 years ) 

[Sebastian Marroquin]

Quote from @Vickie Liu:

Quote from @Sebastian Marroquin:

In my experience, the lender has said NO 100% of the time. If a lender goes to their supervisors and says it is ok, I would put it in writing so that you are cover in the event that the stars align and someone checks up on you. 

It is not worth it to go to jail or have hefty fines or court dates for a couple of dollars savings in your payment… 

Most of the time when you talk to a "lender" they do not know much of the law themselves, and they will go to supervisor  for clarity. 

So be careful who you are getting advise from. If you really want to buy this property and there are no other choices, and this is a great deal you cannot pass up… I would talk to a Real Estate attorney and maybe even your tax professional. They will let you know what you can and cannot do in your state. 

A lender once told me that it comes down to "intent" 

Do you truly intend to use the property as a primary residence? or not? 

It would be different if one of the units were vacant and then 'life changed' for you right after closing escrow and then you had to turn the primary into an investment home. 

What if you : delayed escrow and closed in 90 days and then once you close escrow - you waited another 90 days that the lender allows. 

You could lock in the interest rate for 90 days while you buy it: 

that is 6 months there. :) 

If you decide to do the 3 month escrow plus the 90 wait suggestion : let me know if you need a lender referral 

Thanks Sebastian! Some good advice there! Yes I def should talk to a RE attorney for more information!
Both lenders I talked to have only 30-60 days of rate locking time. If you’re local to Boston I’d like to get more lender referrals.

Btw - the 6-month strategy you talked about - say I lock rate today for 90 days, and I go apply the loan at day 89. Then scheduled to close at day 180. Is that how it works? I thought the rate lock starts only when you apply a loan … still new to this here

 Lender says : that now they also do 60 day rate lock : and you can lock additional 30 days with .25% cost in closing costs).  (1% would be 1 point of loan amount : so 25% of that cost)