Primary Financing for Short Term Rental???

Question

Hi all. I can't be the first to have this idea, but I can't honestly say I've heard anyone else doing something similar. I have what might be a great opportunity to purchase a home off market to make it a short term rental. The home is in the town where I own my current primary residence (which I am keeping, not selling). I am looking at my best financing options and the most obvious best option is purchasing as my new primary. 5% down conventional, great rate. The next best would be purchasing as my second home. 10% down, almost just as good of a rate. If I'm able to save the $27,000-ish by going with the 5% down that would be preferred so I have the funds to complete the cosmetic rehab needed as well as furnish the place and still have reserves. It will still cash flow great with 5% down so that's not a worry.

My question is what would be required of me for it to be legally considered my "primary residence" if I go that financing route? Just have all our mail sent there and say we reside there more often than our current primary residence (which would then be considered our second home, I guess)? And what kind of tax implications would that have if we are short term renting our "primary residence" versus short term renting a "second home". I obviously don't want to do anything that could raise a red flag with the lender or IRS or anything like that. I know if I get financing for a primary residence I'm technically saying that I will live in it for at least a year, but this gets a little grey when talking about making it a short term rental where it will likely be occupied 40-50% of the time and I can still have my mail sent there and technically reside in it the other 50-60% of the time.

Any help is appreciated!

Tim Herman · Answer

@Patrick McCandless you are posting on a public forum that you don't want to occupy an owner occupied home but intend to str. What do you think will happen if somehow they find you are not occupying the home. Mortgage fraud is a federal offense and punishable with a $1 million dollar fine and up to 30 years in prison. That real estate you don't get to sell at the end. Either move into the home or pay the 10% down for a second home. My second home had to be 100 miles from my primary. May want to check with your lender.

Grant Schroeder · Answer

@Patrick McCandless great questions! You will need to live in the property for 1 year as your primary residence to stay above board. Just having mail sent there or living there 51% of the time, especially since this is on a public forum, would be committing mortgage fraud...not worth it. The rules are fairly black and white. Live there for a year as a primary, then you can move or do as you please as a STR.

Matthew Williams · Answer

If you purchase a home as a primary residence and immediately rent out the property in most cases you will be breaking the rules.

BUT

Let's get into the nitty-gritty...

There are definitely exceptions to this and it's not completely black and white. For example, if you were to buy a property as a residence and then have a major life event change (that you can document if it came down to it), it's possible that the circumstances would change and owner occupied property would no longer be one. This could be entirely legitimate. By way of example, if you buy a new primary residence and then immediately get laid off from your job and get another job across the country, renting out that primary residence within 12 months may be permissible.

If you end up occupying the property more than 50% of the time, you might meet the minimum qualification for considering something a primary residence. The way that breaks down might depend on whether or not it's FHA/VA versus conventional, or something else. This is something to explore the specific underwriting guidelines for a loan program. If you want to be extra cautious, ask your loan officer or banker to send you the underwriting guidelines for the loan program your considering and you can verify the documentation yourself.

Additionally, you will have to provide some sort of LOE to your underwriter to document your rationale for buying a new primary or even a secondary home within 50 miles of your current primary residence. This will be particularly scrutinized if the primary residence is not being sold.

Now that we got that out of the way let's talk about how things work in the real world: most banks don't care enough to review their books as long as they have performing loans. I am not under any circumstances endorsing questionable or fraudulent mortgage activity. I am going to, however, give you a related example of this occurring.

I promise this story ties in:

My parents lost a property in foreclosure. The property was underwater and the second mortgage wanted to a full payoff amount and foreclosed on the first mortgage. I'll skip over the details of how this works but you can DM me if you want specifics. The second lien holder then proceeded to pay the first mortgage in my father's name which is loan fraud in that A) the loan was not assumable and B) my father no longer had interest in the property. We called the servicer weekly and sent threatening letters for years... YEARS... And they continue to this day to accept payments in my father's name even after loan fraud has been reported directly to them (we reported it HUD as well to no avail).

The similarity? Because they are continuing to get mortgage payments they simply are not interested in enforcement.

Back to your situation, for most conventional loan servicers as long as they are getting paid they likely don't care. Personally I consider this a problem with the incentive structure and enforcement and I encourage you to not engage in questionable activity. There's a high probability that you would get away with it if you did so.

My parents lost a property in foreclosure. The property was underwater and the second mortgage wanted to a full payoff amount and foreclosed on the first mortgage. I'll skip over the details of how this works but you can DM me if you want specifics. The second lien holder then proceeded to pay the first mortgage in my father's name which is loan fraud in that A) the loan was not assumable and B) my father no longer had interest in the property. We called the servicer weekly and sent threatening letters for years... YEARS... And they continue to this day to accept payments in my father's name even after loan fraud has been reported directly to them (we reported it HUD as well to no avail).

The similarity? Because they are continuing to get mortgage payments they simply are not interested in enforcement.

Back to your situation, for most conventional loan servicers as long as they are getting paid they likely don't care. Personally I consider this a problem with the incentive structure and enforcement and I encourage you to not engage in questionable activity. There's a high probability that you would get away with it if you did so.

Patrick McCandless · Answer

@Grant Schroeder Thanks for the response! So you're saying I'm not technically able to rent out a property purchased with primary residence financing even for one single day during the entire first year of ownership?

PS - I used to use Marcus Watson as my go-to lender in the Phoenix area when I was doing sales out there. I don't think he's with Academy anymore, but thought you might know him. Great guy!

Patrick McCandless · Answer

@Tim Swierczek Thanks Tim I will definitely revisit the second home qualifications if the primary route doesn't pan out which is my first choice.

Grant Schroeder · Answer

Of course @Patrick McCandless! Technically, to stay above board you are not allowed to rent it out for the first year. If it is a 2-4 unit house hack or SFR + an ADU, that is a different story. I have a client who bought an SFR + ADU in San Diego, lives in the ADU and rents out the main house. No problem with that scenario at all since it is treated as a duplex from a lending perspective. My first house hack, I put 3% down on an SFR and rented out rooms since I was still bachelor at the time and it helped me get started in real estate. This is acceptable for a primary residence, but I still had to be living there the entire first year.

I have been with Academy for several year now, but have not met Marcus Watson before. Academy is a great company; I'm glad you were able to work with him in AZ! If you ever need anything in your current CA markets, please do not hesitate to reach out. I will follow this forum chain, I am curious to see how things turn out/what you decide with your property!

Tim Swierczek · Answer

@Patrick McCandless definitely check with your lender for the second home requirements.  It's not good enough to call a home a second home.  You must have it available for your own use and cannot use any rental income to qualify, however, there is more to it than that.  The lender will need to be certain that it's actually a second home and not a rental.  It feels like your intent is that it will be a rental, and you have no intention to use it for your own personal use.  If you don't have a personal use for it then it will end up being an investment property.

Here are Fannie Mae's requirements

https://selling-guide.fanniema...

What are the requirements for a second home?

Second Home Properties

The table below provides the requirements for second home properties.

✓

Second Home Requirements

must be occupied by the borrower for some portion of the year

is restricted to one-unit dwellings

must be suitable for year-round occupancy

the borrower must have exclusive control over the property

must not be rental property or a timeshare arrangement1

cannot be subject to any agreements that give a management firm control over the occupancy of the property

must be underwritten in DU and receive an Approve/Eligible recommendation, with the exception of high LTV refinance loans required to be underwritten in accordance with the Alternative Qualification Path (see B5-7-03, High LTV Refinance Alternative Qualification Path).

1. If the lender identifies rental income from the property, the loan is eligible for delivery as a second home as long as the income is not used for qualifying purposes, and all other requirements for second homes are met (including the occupancy requirement above).

An LLPA applies to certain loans secured by second homes. This LLPA is in addition to any other price adjustments that are otherwise applicable to the particular transaction. See the Loan-Level Price Adjustment (LLPA) Matrix.

For more information related to occupancy types, refer to B2-1.1-01, Occupancy Types.  For maximum allowable LTV/CLTV/HCLTV ratios and representative credit score requirements for a second home, see the Eligibility Matrix.

Patrick McCandless · Answer

@Tim Herman If you re-read my initial question I am asking how this can be done LEGALLY. I'm not asking how to do it fraudulently lol, but thank you for the word of caution. Obviously, purchasing as a primary residence and sticking a long-term renter in it right away is straight up fraud, but my question is geared specifically toward short term renting at an occupancy rate of less than I would actually be occupying it myself.

@Marc Rice Thanks for the recommendation and I did speak with the lender already. He said I just have to occupy it as my primary for at least 51% of the time for the first year and then it's fair game after that. There were no restrictions really when it came to purchasing as a second home whether I occupy it 1 day a year or 150 days a year. He knows it would be in the same town and he never mentioned that being an issue, but I will revisit that before it's too late definitely. Thank you!

@Matthew Williams Thanks for taking the time to get into some detail. The plan is definitely not to have a major life event lol. I guess my main question is what is considered "occupying" the property as a "primary residence"? Like what is the specific criteria? Is it just where you get your mail delivered at least 51% of the time? What if you have 3 homes? Is it where you get your mail at least 33.4% of the time? Does it not have anything to do with where you get your mail, but where you lay your head down to sleep the majority of the time? And yes I'm not so much worried about the loan being called due as I am about tax implications, but I do want to make sure I'm abiding by both of their rules so I can sleep at night. I know there have to be a lot of snowbirds that own a place in Arizona as well as say Minnesota and they have to make sure they are using one as a "primary" more than the other in order to save money on taxes or whatever the benefits might be of calling yourself a resident of one state over another. The only way I can think of that being actively monitored or reported is where you have mail delivered as reported by the USPS.

Marc Rice · Answer

I recommend talking to your lender and learning the occupancy requirements to fulfill your loan. I believe there is a minimum number of days you need to live in the home for it to be owner occupant... I think its 181 days but cannot confirm. Most 2nd home loans have convenants saying you can't use it as a rental property. Once you meet the occupancy limits in your owner occ you could just stop more bookings from it to follow all loan parameters.

Primary Financing for Short Term Rental???

Primary Financing for Short Term Rental???

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