Implications of renting out primary residence which has loan

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
thriftyFaramir
Posts: 45
Joined: Sun Sep 05, 2021 12:48 am

Implications of renting out primary residence which has loan

Post by thriftyFaramir »

Hello,

I recently bought a new home which I was planning to make it as primary residence.
I also own my current home from last 8 years which has mortgage product meant for primary homes. My initial plan was to sell the current home and move into the new home. However, the housing market tanked and my current home is fetching lot lesser value than what I had expected. So, I am planning to hold onto my current home till the market picks up a little.

Now, my both homes carry mortgages which are meant for primary residence. I am planning to rent out at least one of the two houses. Do I legally need to inform the lender or refinance one of the home as a rental property? Or I can go ahead and rent it out without worrying about any consequences.
exodusNH
Posts: 4764
Joined: Wed Jan 06, 2021 8:21 pm

Re: Implications of renting out primary residence which has loan

Post by exodusNH »

thriftyFaramir wrote: Mon Aug 01, 2022 7:01 pm Hello,

I recently bought a new home which I was planning to make it as primary residence.
I also own my current home from last 8 years which has mortgage product meant for primary homes. My initial plan was to sell the current home and move into the new home. However, the housing market tanked and my current home is fetching lot lesser value than what I had expected. So, I am planning to hold onto my current home till the market picks up a little.

Now, my both homes carry mortgages which are meant for primary residence. I am planning to rent out at least one of the two houses. Do I legally need to inform the lender or refinance one of the home as a rental property? Or I can go ahead and rent it out without worrying about any consequences.
You should read your mortgage paperwork. In general, there's usually a minimum period of time you need to live there, something like 12 months. Those conditions will be documented there.
Topic Author
thriftyFaramir
Posts: 45
Joined: Sun Sep 05, 2021 12:48 am

Re: Implications of renting out primary residence which has loan

Post by thriftyFaramir »

Thanks
Carefreeap
Posts: 3353
Joined: Tue Jan 13, 2015 7:36 pm
Location: SF Bay Area

Re: Implications of renting out primary residence which has loan

Post by Carefreeap »

exodusNH wrote: Mon Aug 01, 2022 7:22 pm
thriftyFaramir wrote: Mon Aug 01, 2022 7:01 pm Hello,

I recently bought a new home which I was planning to make it as primary residence.
I also own my current home from last 8 years which has mortgage product meant for primary homes. My initial plan was to sell the current home and move into the new home. However, the housing market tanked and my current home is fetching lot lesser value than what I had expected. So, I am planning to hold onto my current home till the market picks up a little.

Now, my both homes carry mortgages which are meant for primary residence. I am planning to rent out at least one of the two houses. Do I legally need to inform the lender or refinance one of the home as a rental property? Or I can go ahead and rent it out without worrying about any consequences.
You should read your mortgage paperwork. In general, there's usually a minimum period of time you need to live there, something like 12 months. Those conditions will be documented there.
But they also allow for unforseen circumstances. OP I wouldn't worry about it, just keep making the payments.

I'd re-think the "wait until the market gets better" position. Landlording is a job and business cycles can last 7-10 years. Is being a landlord really what you want to do?
Every day I can hike is a good day.
exodusNH
Posts: 4764
Joined: Wed Jan 06, 2021 8:21 pm

Re: Implications of renting out primary residence which has loan

Post by exodusNH »

Carefreeap wrote: Tue Aug 02, 2022 10:08 am
exodusNH wrote: Mon Aug 01, 2022 7:22 pm
thriftyFaramir wrote: Mon Aug 01, 2022 7:01 pm Hello,

I recently bought a new home which I was planning to make it as primary residence.
I also own my current home from last 8 years which has mortgage product meant for primary homes. My initial plan was to sell the current home and move into the new home. However, the housing market tanked and my current home is fetching lot lesser value than what I had expected. So, I am planning to hold onto my current home till the market picks up a little.

Now, my both homes carry mortgages which are meant for primary residence. I am planning to rent out at least one of the two houses. Do I legally need to inform the lender or refinance one of the home as a rental property? Or I can go ahead and rent it out without worrying about any consequences.
You should read your mortgage paperwork. In general, there's usually a minimum period of time you need to live there, something like 12 months. Those conditions will be documented there.
But they also allow for unforseen circumstances. OP I wouldn't worry about it, just keep making the payments.

I'd re-think the "wait until the market gets better" position. Landlording is a job and business cycles can last 7-10 years. Is being a landlord really what you want to do?
It likely isn't an issue, but the only source of truth is the mortgage paperwork.

I agree about randomly going into the landlord business.
LittleMaggieMae
Posts: 1797
Joined: Mon Aug 12, 2019 9:06 pm

Re: Implications of renting out primary residence which has loan

Post by LittleMaggieMae »

exodusNH wrote: Mon Aug 01, 2022 7:22 pm
thriftyFaramir wrote: Mon Aug 01, 2022 7:01 pm Hello,

I recently bought a new home which I was planning to make it as primary residence.
I also own my current home from last 8 years which has mortgage product meant for primary homes. My initial plan was to sell the current home and move into the new home. However, the housing market tanked and my current home is fetching lot lesser value than what I had expected. So, I am planning to hold onto my current home till the market picks up a little.

Now, my both homes carry mortgages which are meant for primary residence. I am planning to rent out at least one of the two houses. Do I legally need to inform the lender or refinance one of the home as a rental property? Or I can go ahead and rent it out without worrying about any consequences.
You should read your mortgage paperwork. In general, there's usually a minimum period of time you need to live there, something like 12 months. Those conditions will be documented there.
This is good advice. It's good to understand the Big Picture. That said, I wouldn't worry about doing a re-fi or informing the mortgage lender. You've fallen into the "gray area". Be aware the property taxes and insurance will be effected for the property you rent (that is not your primary home). you loose any "primary home" Prop Tax deduction - and the insurance will not be for a primary home. Even if these are escrowed with your mortgage - the lender won't care or be informed of a change.

Continue to pay your mortgage(s) and have the proper insurance(s) and Property Tax deduction(s) and all should be well.

FWIW: I started out with a primary home mortgage, but the house became a rental 6 months later... I held and paid that mortgage/insurance(s) for 10 years and then paid the mortgage off (the balance was 20K...) No one seemed to care - lender, county for taxes, insurance(s), tax preparer. I was never questioned on what kind of mortgage I had for the rental.

I would spend more time looking into what kind of info you should track on your rental property for when you do you income taxes. It's a pain in the butt to realize you need info and then to find it, pull it all together a day or two before you are going to do your taxes.

Being a landlord isn't for everyone. If you aren't sure - and like a bit of adventure, stress, drama in your life (nothing wrong with that!) go into it with an exit plan (as in I will give this 24 months or 36 months and if it's horrible this is what I will do "plan".) I'm not good at spur of the moment decisions especially if I'm under stress - so I like to have an "exit plan" to help me navigate decision fatigue.
adamthesmythe
Posts: 4903
Joined: Mon Sep 22, 2014 4:47 pm

Re: Implications of renting out primary residence which has loan

Post by adamthesmythe »

thriftyFaramir wrote: Mon Aug 01, 2022 7:01 pm the housing market tanked and my current home is fetching lot lesser value than what I had expected.
Where is the housing market "tanking"? Is this non-US?
Carefreeap
Posts: 3353
Joined: Tue Jan 13, 2015 7:36 pm
Location: SF Bay Area

Re: Implications of renting out primary residence which has loan

Post by Carefreeap »

exodusNH wrote: Tue Aug 02, 2022 10:36 am
Carefreeap wrote: Tue Aug 02, 2022 10:08 am
exodusNH wrote: Mon Aug 01, 2022 7:22 pm
thriftyFaramir wrote: Mon Aug 01, 2022 7:01 pm Hello,

I recently bought a new home which I was planning to make it as primary residence.
I also own my current home from last 8 years which has mortgage product meant for primary homes. My initial plan was to sell the current home and move into the new home. However, the housing market tanked and my current home is fetching lot lesser value than what I had expected. So, I am planning to hold onto my current home till the market picks up a little.

Now, my both homes carry mortgages which are meant for primary residence. I am planning to rent out at least one of the two houses. Do I legally need to inform the lender or refinance one of the home as a rental property? Or I can go ahead and rent it out without worrying about any consequences.
You should read your mortgage paperwork. In general, there's usually a minimum period of time you need to live there, something like 12 months. Those conditions will be documented there.
But they also allow for unforseen circumstances. OP I wouldn't worry about it, just keep making the payments.

I'd re-think the "wait until the market gets better" position. Landlording is a job and business cycles can last 7-10 years. Is being a landlord really what you want to do?
It likely isn't an issue, but the only source of truth is the mortgage paperwork.

I agree about randomly going into the landlord business.
Actually it's State and Federal law. Lenders put all kinds of stuff in their paperwork which isn't enforceable. As an example they still put restrictions on due on transfer for settled legislation in Garn-St. Germain which was passed 40 years ago. And if you call customer service they often don't know what they are talking about. In general, the less you say to your lender the better. Just keep making the payments.
Every day I can hike is a good day.
TropikThunder
Posts: 3651
Joined: Sun Apr 03, 2016 5:41 pm

Re: Implications of renting out primary residence which has loan

Post by TropikThunder »

LittleMaggieMae wrote: Tue Aug 02, 2022 11:23 am
FWIW: I started out with a primary home mortgage, but the house became a rental 6 months later... I held and paid that mortgage/insurance(s) for 10 years and then paid the mortgage off (the balance was 20K...) No one seemed to care - lender, county for taxes, insurance(s), tax preparer. I was never questioned on what kind of mortgage I had for the rental.
You didn’t tell your homeowner’s insurance provider that the property was no longer owner-occupied?
tj
Posts: 6275
Joined: Thu Dec 24, 2009 12:10 am

Re: Implications of renting out primary residence which has loan

Post by tj »

TropikThunder wrote: Tue Aug 02, 2022 7:31 pm
LittleMaggieMae wrote: Tue Aug 02, 2022 11:23 am
FWIW: I started out with a primary home mortgage, but the house became a rental 6 months later... I held and paid that mortgage/insurance(s) for 10 years and then paid the mortgage off (the balance was 20K...) No one seemed to care - lender, county for taxes, insurance(s), tax preparer. I was never questioned on what kind of mortgage I had for the rental.
You didn’t tell your homeowner’s insurance provider that the property was no longer owner-occupied?
seriously. Thats ballsy. They might care when their claim gets denied.
Topic Author
thriftyFaramir
Posts: 45
Joined: Sun Sep 05, 2021 12:48 am

Re: Implications of renting out primary residence which has loan

Post by thriftyFaramir »

Thanks everyone for the responses.

Here are my replies to some of the comments:

1. I was planning to buy a rental property instead of new primary residence. But some circumstances changed and I ended up in the situation where I have to decide whether I sell my current home or turn into rental property. I have decided to give myself 18months to decide whether I can do it or not.

2. I saw some responses where people have mentioned that I don't need to worry about the lender. Does that mean, in theory, that I am allowed to rent out my new property (where I have not stayed for a single day) and continue to live in my current (old)home. I am not planning to do it. But want to understand the legality around it. (I looked in my lender's contract and they have mentioned that I need to stay in that house for about 12 months. )
tj
Posts: 6275
Joined: Thu Dec 24, 2009 12:10 am

Re: Implications of renting out primary residence which has loan

Post by tj »

thriftyFaramir wrote: Wed Aug 03, 2022 12:12 am Thanks everyone for the responses.

Here are my replies to some of the comments:

1. I was planning to buy a rental property instead of new primary residence. But some circumstances changed and I ended up in the situation where I have to decide whether I sell my current home or turn into rental property. I have decided to give myself 18months to decide whether I can do it or not.

2. I saw some responses where people have mentioned that I don't need to worry about the lender. Does that mean, in theory, that I am allowed to rent out my new property (where I have not stayed for a single day) and continue to live in my current (old)home. I am not planning to do it. But want to understand the legality around it. (I looked in my lender's contract and they have mentioned that I need to stay in that house for about 12 months. )
You can't get primary residence mortgage rates without making it your primary residence
User avatar
8foot7
Posts: 3669
Joined: Mon Jan 05, 2015 7:29 pm

Re: Implications of renting out primary residence which has loan

Post by 8foot7 »

In closing on your loan, the documents will make you attest that you intend to use the property as your primary residence. Knowingly signing that attestation when you know that you won't ever live in the home is mortgage fraud. Don't do that.

If you intend to live in the home, close on the mortgage, but then circumstances change, then in practice there is no need to involve the lender or servicer in any further discussions. Just make your payments and move on.
User avatar
Watty
Posts: 25475
Joined: Wed Oct 10, 2007 3:55 pm

Re: Implications of renting out primary residence which has loan

Post by Watty »

thriftyFaramir wrote: Mon Aug 01, 2022 7:01 pmI also own my current home from last 8 years
.....
However, the housing market tanked and my current home is fetching lot lesser value than what I had expected. So, I am planning to hold onto my current home till the market picks up a little.
Even if the house value is not as high as it was six months ago it might be useful to consider how long ago it could have been sold for its current price. If it was worth the same 18 months ago then think back about how you felt about the home price then. Most likely you felt pretty good.
thriftyFaramir wrote: Mon Aug 01, 2022 7:01 pm Or I can go ahead and rent it out without worrying about any consequences.
Some consequences to keep in mind are;
1) If you rent it for more than a few years you will lose the federal homeowners capital gains exclusion.
2) Many areas have property tax breaks for owner occupied homes. You will need to notify your local tax authority that it is now a rental and your property taxes can go up a lot. How that is handled varies a lot depending on your local laws.
3) You will need to get a different and likely more expensive home insurance policy for a rental property so you will need to let your home insurance company know that it now being rented.
4) Some HOAs have special rules and fees for rentals so you will need to figure out if that is an issue for you. Many if not most condos have restrictions on the percentage of units that can be rented since if that is too high then future buyers cannot get a conventional mortgage.
5) With a rental property that you have owned your depreciation calculations will be more complicated and may be less favorable.

In the 2008 housing crash when people often owed more on their property than it was worth and to sell the house they would have needed to bring a large check to closing. In that situation keeping a house as a rental may have made sense.

If you have a lot of home equity it is a LOT harder to financially justify renting a home that you have lived in just because there are so many downsides. If you really want to own investment property it very likely could make sense to sell your current house and then buy a different house as an investment property.

You might want to start another thread with the numbers about the house to see if people would think it would make a good rental property.
User avatar
rocket354
Posts: 529
Joined: Mon Dec 14, 2015 12:31 pm

Re: Implications of renting out primary residence which has loan

Post by rocket354 »

thriftyFaramir wrote: Wed Aug 03, 2022 12:12 am Thanks everyone for the responses.

Here are my replies to some of the comments:

1. I was planning to buy a rental property instead of new primary residence. But some circumstances changed and I ended up in the situation where I have to decide whether I sell my current home or turn into rental property. I have decided to give myself 18months to decide whether I can do it or not.

2. I saw some responses where people have mentioned that I don't need to worry about the lender. Does that mean, in theory, that I am allowed to rent out my new property (where I have not stayed for a single day) and continue to live in my current (old)home. I am not planning to do it. But want to understand the legality around it. (I looked in my lender's contract and they have mentioned that I need to stay in that house for about 12 months. )
I am a landlord.

The rules in place are because the lenders are trying to avoid mortgage fraud. So the 12-month stipulation is the time period you have to meet where afterwards there are essentially "no questions asked." So you could rent out your old home and have no issues. You would just want to notify your insurance since homeowners and rental property policies are different and you will get claims denied if you don't inform them.

Under 12 months you can still convert it to a rental, you just might have to answer questions at one point. I once had to provide a letter of explanation for why I was converting a home whose mortgage I just refinanced nine months previously to a rental in order to qualify for a new loan for a house I was purchasing to use as a primary residence. But it all went through with no problem. If no one asks any questions, then you are fine.

So for the new home, if you have already signed the paperwork with the intent to make it your primary residence, but circumstances changed that prevent you from moving (which happens regularly; people experience job loss, death, health issues, etc) then simply rent it out if you like, make sure you notify your insurance for the same reasons as above, and then just be prepared to explain your circumstances in the event that your lender starts asking questions.

"The market changed and I realized I could not get as much for my previous house as I thought I could. I would rather not sell the new home and incur losses, so I had to convert one to a rental. Due to market conditions, it seemed prudent to rent out the more recent home." No one can guarantee that such an explanation would work, but I have a hard time envisioning it not working. The only pitfalls might be if the market hasn't really fallen all that much, or if they dig into why your home wasn't sold before buying the new one, etc. But that would take the unlikely combinations of someone both 1) noticing and caring what happened, and, 2) not accepting your explanation at face value and doing some digging. Only you know the specifics of your circumstances.
Mr. Rumples
Posts: 2137
Joined: Sun Aug 25, 2019 7:16 am

Re: Implications of renting out primary residence which has loan

Post by Mr. Rumples »

Its worthwhile checking out the mortgage conditions. In an earlier thread I mentioned I have a friend who is selling her home. She closes next week. She was informed by the attorney that she is getting another $12,000. Turns out the mortgage had some kind of condition that gave her $ if she lived in her home for five years. (This was her first home, perhaps that was why, or perhaps due to being funded as part of a land trust program.)
“To be a Virginian either by Birth, Marriage, Adoption, or even on one’s Mother’s side, is an Introduction to any State in the Union, a Passport to any Country, and a Benediction from Above.”—Anonymous
Carefreeap
Posts: 3353
Joined: Tue Jan 13, 2015 7:36 pm
Location: SF Bay Area

Re: Implications of renting out primary residence which has loan

Post by Carefreeap »

rocket354 wrote: Wed Aug 03, 2022 9:19 am
thriftyFaramir wrote: Wed Aug 03, 2022 12:12 am Thanks everyone for the responses.

Here are my replies to some of the comments:

1. I was planning to buy a rental property instead of new primary residence. But some circumstances changed and I ended up in the situation where I have to decide whether I sell my current home or turn into rental property. I have decided to give myself 18months to decide whether I can do it or not.

2. I saw some responses where people have mentioned that I don't need to worry about the lender. Does that mean, in theory, that I am allowed to rent out my new property (where I have not stayed for a single day) and continue to live in my current (old)home. I am not planning to do it. But want to understand the legality around it. (I looked in my lender's contract and they have mentioned that I need to stay in that house for about 12 months. )
I am a landlord.

The rules in place are because the lenders are trying to avoid mortgage fraud. So the 12-month stipulation is the time period you have to meet where afterwards there are essentially "no questions asked." So you could rent out your old home and have no issues. You would just want to notify your insurance since homeowners and rental property policies are different and you will get claims denied if you don't inform them.

Under 12 months you can still convert it to a rental, you just might have to answer questions at one point. I once had to provide a letter of explanation for why I was converting a home whose mortgage I just refinanced nine months previously to a rental in order to qualify for a new loan for a house I was purchasing to use as a primary residence. But it all went through with no problem. If no one asks any questions, then you are fine.

So for the new home, if you have already signed the paperwork with the intent to make it your primary residence, but circumstances changed that prevent you from moving (which happens regularly; people experience job loss, death, health issues, etc) then simply rent it out if you like, make sure you notify your insurance for the same reasons as above, and then just be prepared to explain your circumstances in the event that your lender starts asking questions.

"The market changed and I realized I could not get as much for my previous house as I thought I could. I would rather not sell the new home and incur losses, so I had to convert one to a rental. Due to market conditions, it seemed prudent to rent out the more recent home." No one can guarantee that such an explanation would work, but I have a hard time envisioning it not working. The only pitfalls might be if the market hasn't really fallen all that much, or if they dig into why your home wasn't sold before buying the new one, etc. But that would take the unlikely combinations of someone both 1) noticing and caring what happened, and, 2) not accepting your explanation at face value and doing some digging. Only you know the specifics of your circumstances.
+1 I really like your response.

I'll add that in the old days lenders used to send out random inspectors who would look for things like "for rent" signs. Today if the bank has an appraiser make a physical inspection s/he may ask the occupant if they are the owners. I also think underwriters may also use social media to ensure there isn't a concurrent rental listing. And of course in the case of a refinance the underwriting will be looking at tax returns. If the property has been previously used as a rental don't expect to get an owner occupied rate! :wink:
Every day I can hike is a good day.
User avatar
Watty
Posts: 25475
Joined: Wed Oct 10, 2007 3:55 pm

Re: Implications of renting out primary residence which has loan

Post by Watty »

Carefreeap wrote: Wed Aug 03, 2022 11:34 am I'll add that in the old days lenders used to send out random inspectors who would look for things like "for rent" signs. Today if the bank has an appraiser make a physical inspection s/he may ask the occupant if they are the owners.
It may not be nearly that complex. In most locations your property tax records will show if you get an owner occupied property tax break and a lender will have access to your home insurance to make sure that is up to date and that should also show if you have rental insurance.

Your credit report will also show if you take out another owner occupied mortgage.

If you request that your mortgage statements be mailed to some other address that would also raise red flags.

As other have said it likely does not really matter after 12 months since that is likely the only restriction on it being owner occupied.
London
Posts: 425
Joined: Sun Dec 11, 2016 11:50 am

Re: Implications of renting out primary residence which has loan

Post by London »

If your mortgage is from a large shop, chances are that loan is sold very quickly. No one will be checking your house as it’s part of a package of loans. No one cares what you do as long as you pay the note.

Lots of boglehead worrying here.
LittleMaggieMae
Posts: 1797
Joined: Mon Aug 12, 2019 9:06 pm

Re: Implications of renting out primary residence which has loan

Post by LittleMaggieMae »

TropikThunder wrote: Tue Aug 02, 2022 7:31 pm
LittleMaggieMae wrote: Tue Aug 02, 2022 11:23 am
FWIW: I started out with a primary home mortgage, but the house became a rental 6 months later... I held and paid that mortgage/insurance(s) for 10 years and then paid the mortgage off (the balance was 20K...) No one seemed to care - lender, county for taxes, insurance(s), tax preparer. I was never questioned on what kind of mortgage I had for the rental.
You didn’t tell your homeowner’s insurance provider that the property was no longer owner-occupied?
Sorry I wasn't clear.

I did change the insurance coverage. The new insurance policy came with a new policy number and I communicated that info to the lender so the escrowed insurance money would be paid correctly. The lender didn't seem to care that the policy changed or that the property was insured as a property that was no longer owner occupied. The insurer just wanted to know the lender and loan number for the policy- they didn't care that the mortgage was not for a rental property.
Post Reply