Home Buying in Big Bear Lake>Question Details

Sara, Home Buyer in Long Beach, NY

Do I have to sign a second home rider, preventing me from ever renting out a property I purchase as a second home for the life of the loan?

Asked by Sara, Long Beach, NY Thu Jan 21, 2010

I intend to use it as a second home, but want to reserve the right to live in it or rent it should my circumstances change at any time. Per the IRS, you can rent out a second home as long as you still use it a minimum number of days per year. It seems the lenders have a different definition and consider a second home a home that you don't live in and never earn income on. We qualified for the loan on the basis that we would not need to rely on income, but we don't want to be in default should we ever want to rent it (the rider states we would be in default if we do this). Should we pull the plug on our escrow and re-apply for our loan as an investment property, even though we intend to use it as a second home? Please help ASAP!!! Days from closing.

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19
Amazing......so many thoughtful and useful answers were given here......... and the ONLY one that gets a Thumbs Up is:

" The term change, the rate change"

Makes you wonder, doesn't it??
3 votes Thank Flag Link Fri Jan 22, 2010
Sara - Read the rider again. It probably says you are supposed to contact the lender to notify them should your situation change.

If your intention is to truly use it as a second home - sign the rider.

Should your situation change in the future - send a registered letter to the lender or servicer explaining your situation.

This keeps you in compliance and the bank will probably not do anything unless you go into default.

Good luck and congrats on your new home!
1 vote Thank Flag Link Fri Jan 22, 2010
@heather Im not sure I fully understand your question or situation. Are you saying you are not planning to live there? You plan to rent it out?
0 votes Thank Flag Link Tue Aug 20, 2013
100% living there, but i might want a housemate if husband is not there and the rider says only he, me, and kids. I know life changes and when I am retired I imagine I might want to travel for a year and rent it out - but unlike a normal loan that says 60days occupancy and 1 year of just you - this says the life of the loan or its fraud/default.
Flag Tue Aug 20, 2013
Sometimes it's easier to ask forgiveness than permission. It's only am issue if you get caught, and chances of that are slim.
0 votes Thank Flag Link Tue Aug 20, 2013
please answer this someone one. We just got blind sided and I am about to walk. We told the bank we intended to live in it full time, occupy immediately - assumed the 30 year mortgage was for a primary residence - but it was not!!!!! We live out of state and have tech jobs that allow us to live anywhere - they jumped to conclusions. I want to reserve the rights to my use of the property and not sign this haunting GARBAGE.....but only have a week to close (seller has a backup offer already if we fail to close!)
0 votes Thank Flag Link Mon Aug 19, 2013
I find myself in the same situation...only it's after the fact. The loan has closed 2 months ago and now the lender is claiming that I committed "loan fraud" because I am renting out the vacation home part of the time. I plan to fight them in court and see what happens. The rider does not state exclusive "occupancy" -- it only states exclusive use, as in I am not submitting it to a rental pool or management company.

We shall see what happens...but it's a whole lot of unnecessary stress. The truth is the lender was sloppy in the way they did the loan and they were not able to sell it as they wished (to the secondary market). Now they are trying to go after us.

They have called the loan due, but it remains to be seen if their arguments will hold up in a court of law.
0 votes Thank Flag Link Tue Feb 7, 2012
@WorldTraveler, any update on what happened next, the court results?
Flag Wed May 16, 2012
@ Sara - there are actually *greater* tax benefits to having it has a pure investment/rental property than as a second home...

If your income is below a certain level it's more beneficial to have a rental property, tax wise, than a second home since you can take a depreciation deduction (and other expenses such as HOA dues, that you cannot normally take as a primary or second home).
0 votes Thank Flag Link Tue Feb 7, 2012
@ Jes Sierra, B.Sc. REALTOR®

What? The second home most def. does NOT need to be "larger" than your first home. Where is that coming from?! I'm sorry but that is totally false.
0 votes Thank Flag Link Tue Feb 7, 2012
To truly be a second home it must be your intent to use the house excluesively for the use of you and your family. Here is the real confusing part. Fannie Mae and Freddie Mac both for primary residence rules state you must occupy the property as your primary residence within 60 days of closing and must occupy it as your primary residence for at least 12 months. Now one would think that the verbage use in the second home rider would apply these same timeline rules, however the 2nd home deed of trust rider does not state a time line. If you mention the intent to rent to your lender, he/she should immediately put you in an investment property loan. However, if you close as a second home and truly intend to occupy it as your 2nd home with no intent to put the home on a rental plan at the time of closing; and if you meet the rules of the primary residence rider (occupy within 60 days and for at least 12 months) then I would assume you would not be in breach of your deed of trust. But, when I got in the mortgage business years ago my manager told me "it is never safe to assume anything in the mortgage business, not even a mortgage". I have posed the same question to closing attorneys that work with my bank. They said without study of case laws they don't know the answer either. My personal feeling is that the same rules that apply to your primary residence should apply to your second home.
0 votes Thank Flag Link Sat Jun 5, 2010
Wow. Thanks all for looking out for me. I needed that. Sometimes I feel like the people working for me are only looking out for their own best interests. I'm going to see what I can do. I don't want this to haunt me.
0 votes Thank Flag Link Fri Jan 22, 2010
Sara, "so I assume that many were financed similarly."

You should not assume. When you assume you make an A$$ out of U and ME

You have to be careful when signing contracts. Despite what many people are crying about and many in washington dc are trying to do, contracts mean something. You are and will be expected to live by the terms of that contract.

"none of them had ever heard of any homeowner running into lender problem"
Congratulations, you could be the first case they hear about. Doesn't that make you feel special?

It is better to be safe than sorry.

that sums up everything I said above.
0 votes Thank Flag Link Fri Jan 22, 2010
Sara, there's a difference between, "I never heard of it happening," and, "Everybody I know is doing it and they haven't had any problems." Your assumption that the neighbors have similar financing in place is only that, an assumption.

So. I'm not going to advise you to put yourself in jeopardy. You understand the terms and conditions of the loan. It says so right in Section 8:

- Borrower’s Loan Application. Borrower shall be in default if, during the Loan application
process, Borrower or any persons or entities acting at the direction of Borrower or with
Borrower’s knowledge or consent gave materially false, misleading, or inaccurate information or
statements to Lender (or failed to provide Lender with material information) in connection with
the Loan. Material representations include, but are not limited to, representations concerning
Borrower’s occupancy of the Property as Borrower’s second home.

There you have it. Also, when you sign the final loan documents at closing, you'll be signing a separate but similarly worded statement.

Except that when you sign that one, you'll be committing fraud.

Hey, I don't make the rules. I just report on what I know about them.
0 votes Thank Flag Link Fri Jan 22, 2010
The rider is below for everyone's reference.
Just to clarify, when I said I talked to my lender, I meant that I talked to my lender's broker. I haven't actually talked to any of the loan processors who work for the lender because I am worried I will raise red flags. I also talked to 2 property managers, 2 realtors, and 2 insurance brokers local the area where my second home is, and none of them had ever heard of any homeowner running into lender problems when they put their second homes on the vacation rental market. This is a location where many of the homes are occupied seasonally, so I assume that many were financed similarly. It makes me feel better knowing that none of the professionals in the area had ever heard of people being restricted from renting because of the way their loan was structured. That doesn't guarantee I won't run into problems in the future, however. I signed the rider because my intention for now is to use it as a vacation home. But one of the main reasons why I am buying in that location is because rentals do well, and it safeguards me should I ever need to offset my ownership expenses in the future.
Thanks all for your feedback. I welcome any additional thoughts or suggestions. I haven't closed yet!
0 votes Thank Flag Link Fri Jan 22, 2010
Hi Sara,
Jaqueline hit it on the mark. We can't really give you a 100% answer to your question, just guesstimates.
You should really be talking to your agent's broker if they don't have any answers. Your lender should be knowledgeable of the scenario that is going on right now.

With an investment property the loan rate will be slightly higher.
The only way it can be a second home, is if the second home is larger than your primary residence and has to be your primary residence to have a lower rate.

It might take close to 2 weeks to restructure the loan since we are on the last two weeks of the month.

Have your lender do some hard thinking on how to resolve this.

Let us know how things workout, that way if others have the same scenario, they can benefit from your answers.

Give me a thumbs up if this helps,

Best Regards,

Jes Sierra, B.Sc.
REALTOR®
Century21 Beachside
Chino Hills, CA
0 votes Thank Flag Link Thu Jan 21, 2010
Realtor and Lender tell me that as long as my intent is to use the property as a second home at the time of obtaining my loan, then if my intentions change down the road it's is acceptable. As long as I am being truthful about my intentions when qualifying for the loan. My intention is to have a second home. I am just worried that they are restricting future use of the property, and the lender says that is not the purpose of the rider. They just want to make sure our intentions for occupancy are truthful when taking out the loan. People's intentions change all the time, and the rider wasn't created to prohibit that.
Does this sound right, or am I being mislead my my agents?
0 votes Thank Flag Link Thu Jan 21, 2010
Hi Sara,
When I searched on the Internet about second home rider, I got your post, I am in the samilar situation as yours, I am wondering if you had a solution orking for you for your seond home being rented out?
I just purchased a second home with a loan and intended to use as our retirment home, but since I am Canadiana and I am just over 47, so I can only go there for a couple of weeks every year for now, therefore I would like to rent it out for the rest of year, but I don't want to voliate any lender rules for the mortgage... Please help. Thanks in advance!!
Flag Thu Aug 9, 2012
Sara....without reviewing your loan docs and speaking with your lender, this is a difficult question to answer. I recommend you sit down with your agent (and broker) and your lender, explain what you are trying to accomplish and look to them for help finding a solution. If you are well qualified, your lender may be able to switch you over to another loan with you needing to cancel and start over. Your agent also needs to provide you guidance regarding a ramifications of cancelling.
0 votes Thank Flag Link Thu Jan 21, 2010
Well, Sara, you need to work that out with a tax specialist, but in my experience, the IRS is concerned with how the property is actually used, not with how it's financed.

However, you need to ensure that you're not in violation of your financing contingency by switching lenders and loan programs at this late date. I suggest you or your agent contact the seller, explain your situation, and ask for an extension.
0 votes Thank Flag Link Thu Jan 21, 2010
So it sounds like I made a mistake in my loan application and need to rescind the loan docs, and re-apply as an investment property. Would having an investment loan preclude me from classifying it as a second home to the IRS? I don't want this to have negative tax implications - to my knowledge there are benefits to having it classify as a second home for tax purposes. I don't want to affect that by having an investment type loan.
0 votes Thank Flag Link Thu Jan 21, 2010
Yes, Sara, you do have to sign the rider - if it's one of the terms the lender insists on as a requirement for making the loan.

The IRS is only telling you how they're going to tax you in certain circumstances, they're not defining how you're allowed to use the property.

The lender is, however, defining the terms under which they will lend you money, and one of those is that you do not use the property as a rental. The other terms, which benefit you, are a lower interest rate and down payment than on a non-owner-occupied home.

So. You can't have it all, you have to pick and choose.
0 votes Thank Flag Link Thu Jan 21, 2010
This may be a simple solution but could you do the following:

A) Turn your primary home into a rental
B) Make the 2nd home your primary residence?

Then it is no longer a 2nd home and the Rider will be invalid.

Too easy a solution?
Flag Mon Mar 11, 2013
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