Renting or Rent to Own - Posted by Kenny

Posted by Frank Chin on January 28, 2001 at 06:40:31:

That was some 20 years ago (early 80’s) when we started. Property values were going up 20% a year. Lenders want 30% down for NOO vs as little as 10% down on OO loans.

Let me say that all of them have now been refinanced at least once into NOO loans. I have to say we constantly think about back them - like fugitives looking over ones shoulders. When we were buying rentals back then:

1- Realtors at that time told us that no one is getting NOO loans.

2- My attorney confirmed lots of closings he did for OO loans were actually NOO. Couldn’t think of one that someone actually did NOO. Advised us that there’s no jail time but just be ready to move if found out. But he added, in a year, your equity will be 30% anyway - so you’ll just get a NOO if you don’t want to move and just Refi.

3- Also told Banks in the New York City area generally sell the loans after making them, and they only service them. They don’t really care. In fact, the mortgage company I used went out of business - and I found out later they were always late paying the taxes, and quietly paid fines out of my escrow.

4- A prospective tenant came with her Landlord/father. We talked shop and he explained he owned several rentals. I told him he must be a millionaire putting 30% down on so many. He laughed and said I must be nuts trying to do rentals on NOO.

Looking back - we would have given up on getting into Real Eastate since we cannot compete with just about everyone not following the rules. We were 20K short of 30% and values for the properties were going up 20K a year.

Renting or Rent to Own - Posted by Kenny

Posted by Kenny on January 27, 2001 at 03:48:26:

I’m purchasing a new property to live in and wanting to rent out my current residence. Will renting trigger DOS clause becuase I have moved to a different location and have to inform my lender of a change of address for any legal documentation to be sent??? They will know at that time that I’m not occupying the property anymore. I have a P.O. Box I use for my tenant’s to send payments for rent. The original loan I got was an FHA loan in 1990.

My second concern is if I get an offer to rent with the option to buy, will the rent with option to buy trigger DOS?? If so what can I do here to prevent this from happening???

I’ve already secured the loan on the new property and I’m out in the water now. Maybe I should have considered this prior to jumping in the lake. But I know that I’m not the only one in the world that has done this. Need some advise on how I would do this.

Re: Renting or Rent to Own - Posted by JPiper

Posted by JPiper on January 27, 2001 at 14:28:48:

The DOS clause won’t be triggered by a lease unless the lease is in excess of 3 years. The only condition here is that some FHA loans have been coupled with low income grants or other subsidy type programs which restrict the property to owner-occupants unless the grant/subsidy is paid off. If your FHA loan isn’t couple with this type of program then you have no problem. Just check your loan documents if you are uncertain. The subsidy programs are typically covered in addendums.

An option will trigger the DOS clause. However, the question is how this option will be detected…particularly if it is not recorded. There are several recent threads below that discuss some of this in detail.

JPiper

Re: Renting or Rent to Own - Posted by Frank Chin

Posted by Frank Chin on January 27, 2001 at 09:08:54:

I’ve move from a home I owned to a new one, and rented out the original one. Had the mailing address changed with no problems. Its not an FHA loan however.

DOS means to me that a sale triggers it - and you’re not selling. I also know that I won’t have problems because when I got the mortgage on the original home, I had to certify it to be owner occupied. But one clause in the certification says “Owner certifies he will occupy the premises for at least one year from date of this document”. Leaves me to wonder if there is no such clause - will living there for one month suffice?

A Real Estate attorney once told me to write this:

"Dear Sir:

Kindly forward all bills and correspondence to (your new address) while my home is under reonvation. Will advise as soon as work is complete."

I thought it was real cute. In fact we got owner occupied loans for rental properties we bought and the letter read:

"Dear Sir:

Kindly forward all bills and correspondence to (your old address) while my new home is under reonvation. Will advise as soon as work is complete."

Funny the banks never followed up.

Re: Renting or Rent to Own - Posted by Kenny

Posted by Kenny on January 28, 2001 at 05:12:28:

JPiper,

I made a mistake. I looked @ my mortgage and it is a VA loan not a FHA. Here is what it stated in my Addenum to Mortgage.

As long as this mortgage is held as security for the Ohio Housing Finance Agency, the Lender (“Mortgagee”) may declare all sums secured by this mortgage to be immediately due and payable if:

(a) All or part of the proptery is sold or otherwise transferred (other than by devise, descent or operation of law) by Borrower (“Mortgagor”) to a purchaser or other transferee:

(i) who cannot reasonably be expected to occupy the property as a pricipal residence within a reasonable time after the sale or transfer, all as provided in Section 143(a)(3) of the Internal Revenue Code; or

(ii) who has had a present ownership interest in a principal residence during any part of the three-year period ending on the of the sale or transfer, all as provided in Section 143(d)(1) of the INternal Revenue Code; or

(iii) at an acquisition cost which is greater than the then current federally disgnated average area purchase price for existing housing, all as provided in Section 143(e) of the Internal Revenue Code or in any subsequent amendments thereto; or

(iv) who has an income in excess of the then current income limits, all as provided in Section 143(f) of the Internal Revenue Code or in any subsequent amendments thereto; or

(b) Borrowor (“Mortgagor”)omits or misrepresents a material fact in a application for this mortgage.

© The Borrower (“Mortgagor”) subsequently leases the property (except upon prior written approval of the Ohio Housing Finance Agency in the extreme hardship circumstances).

Sorry for the long explanation but this is what is in my addendum.

Now with that being said. What will I expect if I lease option this??

What will renting do in this case?? Will I need to disclose my new address to send any legal documents?? Or can I use my P.O. Box as my change of address???

Thx in advance.

Probably not a good idea. - Posted by Brandi_TX

Posted by Brandi_TX on January 27, 2001 at 15:31:22:

Allthough you may have gotten away with lender fraud (lying about occupancy to obtain an OO loan), it is probably not a good idea to recommend it in an open forum like this to people that may not realize that they can get punished for it.

Bad form - but hey what do I know?

Brandi_TX

Re: Renting or Rent to Own - Posted by JPiper

Posted by JPiper on January 28, 2001 at 09:42:40:

Kenny:

The fact that this is a VA loan doesn’t make any difference to my comments above. But what does make a difference is the fact that the Ohio Housing Finance Agency is involved.

This is the so-called “first time buyer” program…dubbed this way because the borrower cannot have owned a house in the prior 3 years. This program extends “bond money” to buyers who meet the requirements, ie they are “first time buyers” (according to the definition), their income doesn’t exceed certain limits (this varies according to the program), and the buyer intends to owner occupy the house.

Typically the bond money is for down payment assistance, but it could also be for a special interest rate. Most of the time when you see these programs the bond money is coupled with an FHA loan. But sometimes you see it with a VA loan…typically in the category of the special interest rate because VA is already a 0 down program.

The state financing authority then secures their “grant” with a mortgage which may be “assumed” by qualifying. Qualifying with the state authority means that you must be an owner occupant, a first time buyer, and your income cannot exceed the specified limits. You would also have to qualify for the underlying loan, in addition to qualifying with the state authority.

Depending on the program it may be released in a 10-12 year period…so that’s something to check.

The problem here is that the state restricts the house to owner-occupants…meaning that renting the house triggers the DOS clause at any time during the course of the mortgage securing it. The only exception to this is a hardship waiver granted in writing by the state and mentioned in your post.

Bottomline…you move out and you trigger the clause. This would be true if you rent the house…it would obviously be true is you lease/optioned the house.

To be honest with you I can’t tell you how closely these are enforced. You’re not just dealing with the lender here…you’re also dealing with the state financing authority. What’s particularly interesting here is that the state addendum is more restrictive than the federal law concerning the due on sale clause (Garn St. Germaine). Garn specifically exempts leases under 3 years. But in this case you have received a special grant or subsidy which carried with it more restrictive requirements ie that you must be an owner occupant.

I have seen ONE person rent a house out that was subject to this type of restriction. So that isn’t much to base an opinion on. I have never seen one of these clauses enforced (but that doesn’t mean they haven’t been, it just means I haven’t seen it). The particular individual that I saw lease his house leased it to his sister…and in all probability continued to have mail directed to the property address. It’s hard to imagine how anyone could have detected this violation of the addendum in this scenario.

However, one possible alert to the lender would be a change in the type of insurance policy to a landlord policy. Whether they follow up on this and alert the housing authority I can’t say.

The issue here is not whether a lease/option triggers the clause. It triggers every clause because of the option itself. The problem here is that even a lease triggers the clause. I think you could get around this…but you will have to change insurance policies.

I can tell you that I have walked past deals with this type of financing in place…because I thought it was a problem. It may be that others would have an opinion here, or some experience with it that will post. Where there’s a will there’s probably a way. But again, the problem here is that renting is prohibted without a special hardship, and therefore a change in the insurance policy may be problemmatical.

Check the financing addendum to see when it is released and how.

JPiper