Ron in California sent this as a warning for anyone declaring they are
going to be living in a property and then renting it out.
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Hello David, While reading this question I recalled the fine print in
one of my mortgage contracts, and the contract states that the Fannie
Mae requirements under Federal Law require all applicants for a
mortgage to state on their application as to what purpose a property
is being purchased, for personal residence or rental/business etc.
The contract, under the “Occupancy Agreement”, asks the purchaser to
sign and confirm that:
1: the Borrower intends to occupy the property as Borrower’s
principal residence.
2: Borrower intends to occupy the property during the (time
period delineated here) period immediately following the loan closing
as the primary residence of the Borrower (i.e.., the property will be
“owner occupied”).
3: If Borrower’s intention changes prior to the loan closing,
Borrower agrees to notify Lender immediately of that fact.
4: Borrower understands that Lender may not make the loan in
connection with subject property without this Occupancy Agreement.
5: Borrower acknowledges Lender has relied upon the Borrower’s
representation of occupancy in securing said loan, the interest rate
or funding of said loan.
THE UNDERSIGNED BORROWER(S) ACKNOWLEDGES AND AGREES THAT:
1. Any misrepresentation of occupancy by
Borrower(s);
2. Borrower(s) failure to occupy the property as the
primary residence (i.e. owner occupied) during the (time period
delineated here) period following the loan closing;
SHALL CONSTITUTE A DEFAULT UNDER THE NOTE AND SECURITY INSTRUMENT
EXECUTED IN CONNECTION WITH SAID LOAN AND, UPON THE OCCURRENCE OF SAID
DEFAULT, THE WHOLE SUM OF PRINCIAL AND INTEREST PAYABLE PERSUANT TO
SAID NOTE PLUS COSTS AND FEES SHALL BECOME IMMEDIATELY DUE AT THE
OPTION OF THE HOLDER THEREOF AND/OR LENDER MAY ADJUST THE INTEREST
RATE TO BE EQUIVALENT TO THAT OF A NON-OWNER OCCUPIED LOAN.
The contract goes on to inform the buyer that it is a Federal crime
under Title 18 U.S.C., Sec.1014 to knowingly make any false statement
concerning any facts in regards to a loan application and the
Occupancy Agreement.
Although many buyers of real estate do buy to flip the property
quickly, if they are making repairs to do so, they must still live on
site as owners and until they find a buyer, and the loan will be paid
off in any event in that case. The rate that was quoted by the lender
has quite a lot to do with whether the owner will be occupying the
property or renting it out.
As I have seen this contract clause to read, and it has been in every
mortgage package since my first purchase, the Lender needs assurance
that the buyer will not rent the property for a few reasons:
Primarily, I would assume, the lender would like to be certain that
some of the processing fees and interest on the loan will be paid
directly to the lender as a bank must consider mortgage interest as a
prime income asset; Secondly, a rented property is not considered as
“safe” an investment as an owner occupied property, and a lender will
not agree to a lower rate for a property that will be rented and would
feel much safer with an owner occupied property, and then will offer
the lower rate. The rub comes when one informs the lender that the
property is to be owner occupied and when the loan is secured, then
goes and rents the property. That case is a Federal crime and will
cause the loan to immediately become due with all interest included
and the lender may choose to additionally increase the interest rate
on the entire loan amount to the higher rate if the lender wishes to
do so.
Regards,
Ron
xxxxxx at xxx.net
A Satisfied Customer of Centa.com since 2003, a US
Citizen/International Property Owner
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