Legal to convert primary residence into rental property? (insurance, loan, interest rate)

[vaskydiver]

I recently refinanced my primary residence that I've resided in for the last 8 years. I am now thinking that it might make sense to move into a larger house since mortgage rates are low and prices are low relative to their peak a few years ago. There is a good chance that I would sell my current primary residence. But if I did not sell my current residence, would it be legal to rent out my current residence even though it was refinanced as a primary residence? And would I be at risk of the mortgage company requiring me to refinance or pay off the loan? I do recall signing a document at the refi closing that said I will reside in the house for at least 1 year. I guess that if I would have had this idea before the refi, I could have just refinanced it as an investment property and then there wouldn't be any issues! It's likely I will sell the house, but just want to know all of my options before proceeding. Any comments are much appreciated!

[garth]

Originally Posted by vaskydiver

I do recall signing a document at the refi closing that said I will reside in the house for at least 1 year.

You already have your answer. It's in your loan documents.

However, there's probably more to that setion than the one line you quoted. Be sure to read it because I expect it to speak about qualifications to the one year primary residence. It may say something like the mortgage company cannot unreasonably deny your renting of the house. Those are not the exact words, so be sure to read the section in your loan document.

Otherwise, if you do choose to rent the hosue out, the loan holder MAY consider it a violation of the contract that you have with them. They MIGHT try to call it fraud, even though you say you didn't go into the primary residence refinance with the intention of turning it into an investment property. The issue is whether or not they would find out. Chances are that they wouldn't but that's a gamble you would make.

Since you would be changing your insurance from a homeowner's policy to a landlord policy, the loan holder would get notice of the change. They have an interest in the property so they want to make sure it's properly insured. That's one way they could discover that you're no longer living in the house. Whether or not they would act on it is something that only they would decide.

So, how is that for dancing around the issue with no concrete answsers.

[vaskydiver]

Garth,
Thanks for the info. I posted the question to get opinions because this is very much a grey area. It looks like I will sell the house if I find a good deal on a single family house. And if I don't find anything I like, I will just stay where I'm at for a year, and then turn it into a rental. That is, if interest rates and prices don't rise too much. Thanks again.

[SmartMoney]

Actually, the document you signed was based on "intent."

Examples of fraud: Writing a contract on new construction for delivery 6 months out, but closing on your refi the day before. Refinancing and tenants move in before the first payment is made. I actually had a "for rent" sign go up the day a lock box was taken off the property.

You say "recently." How recent? Have you made the first payment yet? Did you refi or modify? Was any of the principal forgiven from a first or second trust? Did you refi under HARP? It's real hard to prove intent. No one is going to come after you if there are no overt signs you had this planned all along. But, if you participated in a federal program to refinance, you used tax dollars. Fraud is frequently reported by ticked off fellow citizens.

I suspect there is a reason for your reluctance. If your Realtor was party to the refinance (sending you to one lender to refinance and another to purchase), you're playing with fire.