Q: We recently purchased a second home with a 30-year mortgage. The mortgage documents contained a provision that stated that our use of the home would be as a second home. Do I need the mortgage company’s approval to change the use of the home?
A: If you purchased the property as your second home and your intent on the day you closed was to use the home as a second home, you may have to get your lender’s permission if you no longer will use it as either your primary residence or as a second home.
The issue you face is whether your decision now to change the use for your property was known to you when you purchased the home.
If you knew you wanted to rent the home when you closed, you were not truthful with your lender. In some instances your failure to be truthful on the loan application and on the closing documents would be considered mortgage fraud.
The lender’s decision to give you a loan for this home was based in part on your intended use for the property, in conjunction with your credit history and credit score. Generally, you’ll get the lowest pricing on a loan for the purchase of a primary residence, and in many cases a second home or vacation home. The pricing usually goes up quite a bit for residential rental properties and other types of investment real estate.
Lenders Distinguish Between Residential and Investment Properties
In some cases, lenders only give out loans to borrowers for residential properties and they do not venture into loans for investment properties. So if you intended to rent out your property from the get-go and wound up using a lender that doesn’t do loans for investment property, it could be a problem.
This is an important distinction for lenders. They want to make sure they know who you are, what your credit history is and what the property will be used for.
Let’s assume you were truthful when you applied for the loan about what your plans were, and nothing changed before the closing. But now there has been a change in your plans: Perhaps you have lost your job, you find that you need to bring in income due to economic changes or there are other factors that have lead you to rent out your property.
Mortgage Loan Documents Describe Lender Notification
Do you have to tell the lender? What do your loan documents say? The loan documents may only require you to notify the lender of the change in your use of the property during the first year following the loan closing.
Most standard residential loan documents require borrowers to certify at closing that they plan to use the home as their primary or secondary residence and will continue the use of that property as their home for one year following the closing or settlement date.
However, if something changes after the closing, you can decide to rent the home or use it as your primary home or vacation home. The key for you is whether you were truthful at the time of your application and at the time of your closing. If you do approach the lender about the change in use, the lender usually must consent to extenuating circumstances that brought you to ask for the change.
Finally, with lenders burdened with calls from borrowers falling behind on their loans and flooded with requests to work with borrowers to delay foreclosures and rework loans, you’re likely to find out that your lender is just happy that you are a borrower who is paying on time and plans to continue paying on time.