Help!
My husband and I own two single family rental properties (one of which my parents live in). My parents recently purchased a home in the neighborhood where my husband I live with the intent to move. My father was diagnosed with some medical conditions just before closing and they no longer want to move. They do however, now own this house. Can we legally turn it into a rental considering that the loan was taken out with the intent for primary residence? Should we contact the lender to advise. I assume the insurance coverage will have to be changed. Any advice would be appreciated. Thank you.
The key word was "intent." It was intended as owner-occupied, but plans change. A similar thing happened to a friend of mine about 5 years ago. The only thing that came up is that when he sold the property, he had to pay capital gains taxes because he wanted to use the proceeds to help buy a primary residence. He could of done a 1031 exchange to avoid this, or refinance and keep the rental, but he didn't. He ended up paying about $10k in capital gains taxes.....something to keep in mind for when/if you sell it. You can get around this by owner-occupying the property 2 out of the last 5 years before you sell it......
As far as insurance, yes I would definitely call the insurance agent and convert the policy to a landlord policy. I wouldn't contact the lender. The health issues really aren't their business. The point is that when the paperwork was signed indicating the intent was to be owner-occupied, that was the truth and that's all that matters.
I have heard of people intentionally buy OO (owner-occupied) when they intend NOT to occupy the property, and that is intentionally defrauding a lender. What happened in your case was simply a change in plans.
[addsig]
Thanks much for the reply! One question... in changing the insurance coverage will not they contact the lender with the new policy information indicating that the property is to be treated as a rental? My concern is that they will then accuse them of fraud.
I have rentals and Landlord insurance policies. Recently, a lender contacted me that they didn't have a current info from the my insurance. I doubt that your insurance will contact a lender volunteerely unless you ask them to. Usually, you have to submit an updated insurance info once a year. So, you, probably, will be OK for this year. You don't have to worry about next year because lenders's requirement for owner occupied property is 1 year in most cases.
Alla
I want to start by praising you for asking this question. Unfortunately, there are lots of people out there who think that it's okay to commit fraud by taking out a mortgage for an owner occupied property, but then simply renting it out and not informing the mortgage holder. You clearly want to do the ethical thing and I tip my hat to you for being honest.
I'm not a lawyer, but I think the deciding point will be whether or not your parents decided to not move in because they simply didn't want to, or because they couldn't live in the house for whatever reason. If it's the latter, then you should be okay. Like Shirley said, the big question is intent.
Thanks all for your input and advice. It is much appreciated. I feel confident that all will work out.