By: Ilyce Glink and Samuel Tamkin
Q: I have a question about renting a second home that has a mortgage that states “you cannot rent this property.” Here’s the story.
About two years ago I bought a beautiful cabin in Blue Ridge, Georgia that was a foreclosed property. I purchased it for about $100,000 under the appraised value. It was a second home at the time.
I remember signing a document at closing that said that I could not rent the house. But now, two years later, I do want to begin renting it. Can you give me advice as to how I can go about renting this place or how I can “work-around” this? Do I have to refinance my mortgage?
A: The good news is you can most likely begin renting this property right now, without having to refinance.
Often, when you apply for a mortgage for an owner-occupied property, you are prohibited from renting the property for a period of time, typically the first year. After that period of time, you can do whatever you want with the property.
You might wonder how would anyone know if you turn around and rent out the property the day after closing. The answer is that mortgage companies used to check on this sort of thing. Not every loan, but here and there a spot check would be performed to make sure that the property was actually occupied by the owner of record.
We’re not sure that anyone checks on this anymore, at least not that we’ve heard of. So the upshot is that when no one from the mortgage company bothers to verify whether the property is owner occupied or rented, many buyers apply for an owner-occupied mortgage (which is less expensive from both an interest rate and fees perspective) fully intending to rent out the property from day one.
You might wonder why there is even a difference between owner-occupied loans and investor real estate loans. The answer is risk. Over the past 70 years, there has been a much lower risk of failure with owner-occupied mortgages than investor loans.
Investors tend to take bigger risks, have more problems keeping properties rented, and are more likely to stop making payments. But for owners who actually live in their homes, making that monthly mortgage payment is the only thing keeping them from being tossed out on the street. It is a huge motivating force and the reason why so few homeowners overall stop making payments and go into default.
You could refinance the property, but why? You should be fine to rent, now that you are two years out from the purchase date.