We recently got into contract for a property near by our current primary home. The new property is bigger in sqft and we are looking for a space upgrade and intended to move. Our mortgage application is getting processed for primary home.
The new home is very dated and needs lot of upgrades. Spouse doesn’t want to move until it’s updated and asking if we can rent it out( for an year), until we pool funds for upgrades. I sense trouble with that and wanted your expert opinion.
So you would have two homes to pay mortgage on? I’m going to guess that unless you bought a duplex, the rent you’ll get is less than the mortgage. Is that the case? If so, will you be able to amass funds quickly enough?
Have you looked at the local rental market–do you have an idea of what you can get?
When you apply for mortgage at new primary home, bank is treating as primary home hence you get lower rate. I believe the general requirement is that you agreed to live there for at least 1 year. Having said that, I haven’t heard anything about Bank doing follow up check.
Basically if you do what you were thinking - renting out your new home first before you move in, you are violating the agreement you sign with the bank and they can call back their loan if they find out. So that’s the risk you are taking. Maybe better to consult some professional about it.
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I would not do this.
"1. Occupancy Fraud (Fraud by the Borrower)
Different rules apply when you’re buying a home you plan to live in as your primary residence versus one that you intend to use as investment property. Rules also differ if the home will be a vacation home, otherwise known as a “second home.”
Investment property: An investment property isn’t your primary residence. It’s an instrument that you buy to make money. It could be a single-family house, a condo, a townhouse, or an apartment building that you plan to rent out. Investment property could also be commercial property, or it could be property that you intend to flip—property that you intend to fix up and sell at a profit.
The loans you get for investment property typically come with higher interest rates—maybe half or even a full percentage point more that what you’d pay for a mortgage loan for a primary residence. This could translate to an extra $100 or $200 more a month. Loans for investment property also often require bigger down payments than both primary residences and vacation homes do.
Vacation home: A vacation or second home is property you buy that you will use as a residence for part of the year. This second home could be a lake house, a condo on the beach, a cabin in the mountains, or a place in the city that you use for business, just to give a few examples.
The loan rules can be strict with second homes because loans for second homes usually come with lower interest rates than loans for investment property do. Typical rules from lenders might include that the home is in a vacation area or near your work. You might need to sign a rider saying you agree to use the property exclusively as your second home and that you will not rent it out or use it as a timeshare. If you plan to rent this vacation home part of the time and use it yourself part of the time, you would need to get an investment loan instead of a second home loan.
The fraud: Because the rules favor people who use a home as their primary residence or second home, some people fraudulently say the place is their primary residence when it really isn’t. And by some, we mean a lot. Occupancy fraud is one of the most common forms of mortgage fraud, according to The Washington Post. And this scam rose 20% from 2011 to 2013, the years Fannie Mae sampled this type of fraud.
One reason occupancy fraud is so prevalent is the belief many people have, which is, “Who’s going to find out?” They figure the lender won’t take the time to come knocking on their door to see whether they’re really living there or not. That thinking is wrong. Lenders have always used “door knockers,” although there are probably a lot of misses in that system.
Lenders today are more sophisticated, however. They know people often lie about their intended use of the home. So lenders now use fancy algorithms to find fraudsters. While lenders and risk management firms probably don’t want to divulge all their secrets, you can pretty much count on the fact that they can search public records to determine where you really live—records such as your utility bills, your credit bureau files, your tax data, and so much more.
The penalty: So what happens if you lie? Lenders can stop doing business with you and call in the loan. If you won’t pay it in full right away, expect foreclosure proceedings to follow. Sometimes lenders turn you in to the government by filing a report called a Suspicious Activity Report (SAR). This puts you in a database that lenders look at. If you wish to take out another mortgage or refinance a mortgage, and a lender sees your name come up with a SAR, you might not get the loan. And if you’ve done this before with other properties, you might receive an unwelcome visit from the FBI. You’ve just committed mortgage fraud, which can involve a permanent residence in another place: prison. "
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Thanks for all the replies. We will move as planned and rent our current home.
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