Q: I bought a house as a primary residence in 2006. In 2007, I bought another home that I intended to use as my primary residence.
I had intended to sell the first home but the market softened so much I decided to wait. I ended up renting the house and plan to sell it once the market improves.
I was recently informed by my lender that their current lending guidelines require my first home be owner-occupied. I tried to appeal but they didn’t budge.
I did some research and found commentary that said owner-occupancy is usually required for just the first year. So I reviewed my loan document and found that owner-occupancy is indeed required for just the first year.
I’d like to know if the clause from my loan document is sufficient. Even if their current guidelines dictate owner-occupancy for all loans, will satisfying the terms of the loan I signed override their current requirements?
A: Yes. The documents you signed govern your relationship with your lender. That said, the lender may question the truthfulness of your loan application and the statements you made to the lender.
When you first applied for your loan, you probably told the lender that you intended on using the home as your primary residence. At the closing of the purchase of the home and when you signed that large stack of documents at settlement, you once again stated to the lender that you intended to move into the home and use the home as your primary residence for at least one year.
In some cases, some lenders have the borrower – that would have been you – sign multiple documents that essentially say the same thing: you will live in the home as your principal residence and that the lender has given you the loan on the basis of your representation that you plan to use the home as your primary residence.
You probably found language in your mortgage or trust deed that states as follows: “Borrower shall occupy, establish, and use the Property as Borrower’s principal residence within 60 days after the execution of this Security Instrument and shall continue to occupy the Property as Borrower’s principal residence for at least one year after the date of occupancy, unless Lender otherwise agrees in writing, which consent shall not be unreasonably withheld, or unless extenuating circumstances exist which are beyond Borrower’s control.”
From the lender’s perspective, it’s suspicious that you purchased your first home and then purchased a subsequent primary residence about a year later. It raises the question as to whether you truly intended on purchasing the home as your primary residence and whether you maintained the home as your primary residence for that first full year.
If you moved into the first home and lived there as your primary residence and then decided to buy another home and move, you should be fine. But if you purchased the first home, moved in and shortly after moving in decided to buy the second home, the lender may feel that you did not abide by the terms of the loan and did not really intend to use the first property as your primary residence. but rather to buy and flip the home.
So while you may be getting inconsistent information from the lender, it’s probable that the lender’s guidelines have remained the same and the issue is that you purchased two homes in a relatively short period of time.
By the way, most lenders rarely find out that a borrower isn’t using a home as a primary residence. Did your lender audit your file and discovered that you were no longer living at the home?
Finally, if you complied with the terms of the original loan documents, the lender can’t later retroactively apply new loan conditions to your home purchase. For more details on your lender problem, please speak to a real estate attorney.