Home Buying in Fremont>Question Details

Shiva, Home Buyer in Fremont, CA

Home buying with a loan for primary residence vs investment property

Asked by Shiva, Fremont, CA Fri Nov 16, 2012

please chime in how things will work out in this scenario.

At the time of buying a home, the buyer intent is to use it as primary residence and applies for a loan with better interest rate as it is primary home. And later decided to rent it out and continue as investment property due to some reasons. Would lending bank will anyway involve in increasing interest rate later or question the buyer on this change? Otherwise any buyer really want do investment also can claim as primary and just change? I would assume taxes will change at the end of the year for primary vs investment. Are there any other implications behind?

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Shiva,

One element of your question really made me take notice. Lenders do charge more for investment properties as opposed to owner-occupied properties due to risk.

Lenders also occasionally go back to verify that the person who bought the home changed their address with regard to employment, mail, etc. to verify this from time to time.

If they suspect fraud, they will not raise the rate, they will call the loan, meaning that the loan will become due and payable at that moment. This is their prerogative and they do this again because of the inherent risk involved in an investment property.

My recommendation for anyone with this thought process would be to completely move into the property, change their address on all and at least live in the property for a year before deciding to make any change. The risk is too high.
0 votes Thank Flag Link Tue Dec 18, 2012
Shiva:

You ask: Would lending bank will anyway involve in increasing interest rate later or question the buyer on this change?
A: As stated below, this is a very common scenario. Many move out of their existing home, leave the current mortgage intact and then go buy a second home that becomes their primary residence. In many cases, they do not report this to the lender. I’m not stating what is “right or wrong” – I’m reiterating what frequently happens. This typically becomes an issue if you want to refinance the first property – then investor guidelines kick in. I am personally not aware of any situation where the bank called the loan on the first house. As long as payments are being made on time, banks typically leave things alone.

You ask: Otherwise any buyer really want do investment also can claim as primary and just change?
A: Normally under this scenario, you move to the second house and begin to claim it as your primary address. You need to talk to an accountant to get clarification about the taxation regulations involved.

You state: I would assume taxes will change at the end of the year for primary vs investment.
A: That is correct – you income taxes will change at the point you claim the first home as an investment property. You will need to work with an accountant to make sure you get all of the benefits that come with owning an investment property – and there are many.

You ask: Are there any other implications behind?
A: This is a very common scenario – when you choose an accountant to assist with taxation, I’d recommend you use one with personal experience with rentals. I can recommend one if you need one.
0 votes Thank Flag Link Sun Nov 18, 2012
Normally an investment property or second home requires a minimum 25% down payment. Primary's you can get at 20% or less.
0 votes Thank Flag Link Fri Nov 16, 2012
is it possible to refinance that 25% as equity? what if i have 70% loan to value?
Flag Sun Jul 28, 2013
Hi Shiva,

"At the time of buying a home, the buyer intent is to use it as primary residence and applies for a loan with better interest rate as it is primary home. And later decided to rent it out and continue as investment property due to some reasons. Would lending bank will anyway involve in increasing interest rate later or question the buyer on this change?"

You have not provided any actual timelines so this muddies the water a bit. However, most definitely you will be relegated to a higher-rate investment loan if you refinance your former primary residence.


"Otherwise any buyer really want do investment also can claim as primary and just change?"

Two of the most important documents Escrow provided during the initial purchase and refinance of the property are your Promissory Note [ the contract between you and the Lender where you commit to pay back the loan provided ] and the Deed of Trust [ the security instrument that binds the property to the lender in case you default on the loan ].

Most borrowers concentrate on the Promissory Note because it details how the loan will be structured; however, the Deed of Trust can be more important from a contractual focus.

Case in point:
If you spend less than one year in your primary residence after purchasing or the refinance you may have breached your Deed of Trust "contract". The link below provides the page in the Deed of Trust covering Occupancy, which states, "...shall continue to occupy the Property as Borrower's principal residence for at least one year after date of occupancy...”
http://docs.Steven-Anthony.com/FannieFreddie3005-Occupancy.pdf

Note such a determination is subject to "Extenuating Circumstances", typically described as "nonrecurring events beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations."


" I would assume taxes will change at the end of the year for primary vs investment."

Property taxes do not change when a property converts to an investment property; however, your personal taxes will most certainly change on annual basis, and certainly long-term capital gains tax.

The process of assessed value increases and reductions are covered in this blog post:

"Estimating Property Taxes in CA"
http://www.trulia.com/blog/steve_ornellas_mba_re_mastersgri/…

-Steve
0 votes Thank Flag Link Fri Nov 16, 2012
As others indicated, interest rate won't be affected due to primary residence to rental property.But you want to make sure what is your intention in purchasing property when you get your loan. You may buy as primary residence and live there for couple year and than you can rent it out for investment purpose.The best bet for you is talk to your realtor,loan broker and tax consultant for accuracy of this information.
0 votes Thank Flag Link Fri Nov 16, 2012
At the time you close escrow, you will sign documents from the lender that state it is your intention to live in the property.
If you 'change you mind' and never move this would be considered, worse case, loan fraud. The lender could discover you are not living in the property (initially) and call your loan.
If you do move into the property and a reasonable time later (1 year or so) decided you want to purchase another or have to move for work reasons, this would be acceptable.
If you are not certain whether or not you are going to move into the property, you should definitely purchase the home as an investment.
0 votes Thank Flag Link Fri Nov 16, 2012
Many people are or have found themselves in the same scenario. They start out buying property as their residence...later they buy something else to live in and then decide to keep the first one as a rental.

Taxes will be based on the purchase price (tax basis), not the reason for which it was purchased.
Mortgage Interest on that property isn't going to chance unless the buyer got an adjustable rate. The change in payment won't be due to the change in type of property. It may change if the buyer refinances in which case the new mortgage payment may be based on what the property is being used for.

Good luck
0 votes Thank Flag Link Fri Nov 16, 2012
Taxes are based on the selling price, so there would be no change.
The buyer should inform the new lender as the down payment and interest MAY change. Most people do not do this on purpose, however it has been done before. There are no implications for you.

Brian
0 votes Thank Flag Link Fri Nov 16, 2012
Yes the interest rate will change when you will refinance and show it as a rental property. The taxes will not have a change in it because taxes is based on the location not whether its a primary residence or rental property. No implication just make sure when you are buying the property as owner occupy use it as a owner occupy and if you buy it as a investment use it as an investment.
0 votes Thank Flag Link Fri Nov 16, 2012
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