Buying a home to live in is the goal for most of us. The mortgage world has a term called “owner-occupied,” which means the borrower will live in (occupy) the home. Owner occupancy comes with several benefits compared to rental property loans such as better interest rates, less down payment, and more loan options. Although, just because someone purchases a home as a primary residence doesn’t mean it will always be owner-occupied. Goals and situations often change for many homeowners. Reasons could be job relocation or loss, sickness, change in family size, downsize, or just the decision to become an investor. Therefore, many prospective home buyers or current homeowners want to know, “How soon can I rent out my home after closing?”
There are fundamental rules that buyers and homeowners need to follow to follow the rules of their mortgage and stay out of trouble.
Owner Occupied Mortgage Requirements – Avoid Occupancy Fraud!
At closing, borrowers are not just signing paperwork. Both sides of the transaction are promising to do certain things for the other party. The lender provides the terms of the mortgage loan. Then, the borrower states he/she will follow the terms of the mortgage.
Additionally, the borrower certifies the information provided on the loan application, closing papers, and other documents are true and accurate. These certifications the borrowers make are not just to the lender. These certifications are to the lending agency such as Fannie Mae, Freddie Mac, VA, FHA, or USDA. Thus, providing erroneous information to improve loan terms or even approval is considered mortgage fraud.
Big No No’s to Avoid
Mortgage Fraud is a federal crime. Not only could the mortgage note be called due in full immediately, but there could also be huge fines and jail time. To avoid occupancy fraud, ensure that there are no misstatements like stating this will be a primary residence, but it is really:
- Buying for another family member to live there that cannot qualify on their own
- Going to rent out the home
- Using it as a second home
- Running a business out of the home and not living there
- Tearing down the house (unless getting a renovation loan and this is known)
More than likely, the above would not be acceptable to an owner-occupied mortgage loan. Yes, the terms would be better if stated that it would be a primary residence, but it is always the right answer to state what it is going to be.
What if my real estate agent, loan officer, or someone else tells me to do this? It is still mortgage fraud, and it could take that person down just as well.
When Can I Rent Out My Primary Residence?
Okay, let’s say that you have done everything correctly. You purchased a home as a primary residence and lived in it. But now, you have a good reason for turning it into a rental property or vacation home. Generally, the terms of the mortgage or deed of trust state that it is your “intention” to occupy the property as a primary residence for at least 12 months (if there is an investment or second home rider to the mortgage/deed of trust, no worries).
Renting Out a Primary Residence After 12 Months
Guess what? Life happens! Whether you plan to rent out the home in the future or if circumstances change, it is okay and legal to convert an owner-occupied property into a rental. Although, remember to change your insurance coverage and notify your lender of the address change.
Renting Out a Primary Residence Before 12 Months
First of all, this is not to show someone how to commit loan fraud. But, as we said, life happens. What if someone buys a primary residence and then loses their job or has to relocate? Furthermore, what if a serious illness requires a move. Lenders will probably look into the situation, but these cases would be out of the borrower’s control. Thus, there is no intent to commit loan fraud. Just make sure you can prove the situation to cover yourself.
Best Mortgages for Owner Occupied Homes
Therefore, if truly buying a primary residence, there are a ton of great home loan options. They include no money down options such as VA loans, USDA Rural Development, and combining with down payment assistance products. Next, there are several low down payment ways to buy a home such as FHA, HomeReady, Home Posssible, down payment assistance, traditional conventional loans, and more. Then, if building a home options include a construction loan combined with one of the above permanent loans.
With the multitude of home loan options available for buyers today, buying a primary residence is real possibility for most.