Proposed Use of A Property and Your Mortgage

Our investment property meant for a quick flip can no longer be sold because of the market. A no-rental clause keeps us from renting it currently. It's unlikely that we'll be able to refinance (to ditch the no rent clause) due to the reduced value to mortgage amount. We need to rent to recoup losses, but this would be mortgage fraud with the current contract. What are the possible consequences of doing so?

3 Answers

I'd be very interested in knowing what you mean by a "no-rental clause." I've seen hundreds -- if not thousands -- of mortgages and mortgage notes in my day and never encountered one which said "you can't rent this property."

Usually, representations by a borrower regarding the proposed use of the property are made in the course of the mortgage application. In fact, the Uniform Residential Mortgage Application specifically asks whether the property will be the borrower's primary residence, a second home, or an investment property.

If you intended to live in the property when you applied and actually ended up moving in after the closing, there is nothing that I've seen that would prohibit someone from moving out at a later date and renting the property out. Of course, there has to be good faith -- moving some furniture in and having your utility bills sent there for a couple of months probably wouldn't cut the mustard. So, there is definitely some grey area there and if someone were accused of mortgage fraud in connection with a misrepresentation regarding proposed occupancy, the relevant fact-finder would have to consider the totality of the circumstances.

Before I go on, I'd like to say a little about terminology. You say in your question that the property in question is an "investment property." There's no question that for just about everyone in the country, their home is an investment and that they hope it will increase in value for years to come, generating equity to pay for their children's tuition, retirement, etc., or even just some money to buy a boat when they sell the place next year. However, in the mortgage world, " investment property" is any property that you don't live in. If you moved in at closing or shortly afterwards, regardless of the fact that you hoped to make some money when you sell it at some point down the line, it was a primary residence. Like I said before, however, lenders are indeed cognizant of the fact that things change.

Bottom line: if you moved in after closing and lived there for a while you are probably ok to rent it out later. Before doing so, have a lawyer read your mortgage and mortgage note to make sure that those documents don't contain what you refer to as a "no-rental clause." On the other hand, if you told the lender that you intended to occupy the property as your primary residence, and after your closing just turned around and re-listed it for sale without ever moving in, you've probably committed mortgage fraud. In that case, get a lawyer right away -- the consequences could be dire.

It really depends what state you live in as local law governs many of the issues you raise. The 'no rental' clause is probably not enforceable, however it you lied on your mortgage application documents and said that you were going to live there when that was not your intention, you have another kind of problem: It is a federal offense to supply a national banking institution with false information. The government does not usually prosecute these kinds of cases unless the institution suffers a loss. If this is your situation you should seek local counsel promptly. Whether or not the mortgage servicer can come after you for a deficiency is strictly a matter of local, ie. state law.

I don’t think that any consequences have been left as you have tried every single possibility, according to me the only thing you may do to get your property back is making the proper payments to the company and get your papers back. The most prescribed way would be either to pay back all your amounts due or else you’ll be finding many private companies who can assist with quick cash and pull you off from that strangled situation.