FHA Streamline Refinance Occupancy Guideline
by Tracy from Menifee
Ask Kate about FHA streamline refinance vs occupancy guideline: Immediately after Tracy refinanced her owner-occupied home with the FHA streamline program, she moved out the house and into her rental property. Here's the problem - Tracy declared on the lender's occupancy agreement that she intends to live in the refinanced property for at least 12 months.
Tracy asks Kate about Breaking FHA Streamline Refinance Occupancy Agreement
Kate, My husband and I just refinanced our home with FHA Streamline as our principal residence. We also own a second home which has been our rental property for the last 3 years.
However our renters had to break their lease due to a job transfer out of state.
They gave us notice near the end of our refinance process with the home we live in.
We decided to move back to the other home because it is a larger mortgage with higher bills. So we thought best to assume the more expensive house. We moved out after the loan closed.
We plan to rent out the home we just refinanced in the next few months, probably March 1st. So we will be paying two mortgages for a few months. We don't want to hide information from our mortgage company who just refinanced our home. But we will not be able to live in it for one year as the FHA guidelines state.
What is the best way to handle this situation? Thank you in advance for any assistance you may provide.
Kate Answers: FHA Streamline Refinancing vs Occupancy Guideline
As I see it, you have a couple of choices.
You could wait until the lender contacts you regarding the fact that you moved out of the property immediately upon closing the FHA streamline refinance.
Or you could initiate a call to loan servicing to discuss the broken occupancy agreement.
Or you could take no action and cross your fingers that the lender won't notice.
Regardless of your choice, it's a distinct possibility that your mortgage lender will discover you are not living in the home. How do I know this?
Homeowner's Insurance Binders Verify Occupancy Status
One of the last actions before finalizing the loan process is getting proof of homeowner's insurance. Called a binder, it verifies occupancy status. Lenders pay attention to this before drawing up final loan documents to verify the status on the binder matches your occupancy agreement that you signed in the initial mortgage application.
Now I'm assuming after you moved out of the newly mortgaged home, you contacted your insurance agent to switch your owner's and landlord's fire, theft, and liability policies to the appropriate properties.
In addition to the change in coverage, they most likely notified your lender of your new address. In fact, I'd be surprised had they not!
Mortgage Lenders and Occupancy Agreements
But how much time will pass before the lender reviews and possibly takes action on the broken occupancy agreement? Your guess is as good as mine.
But at the very least, I'd get a jump on the possibility by preparing for a notice from the bank that you are not in compliance with the terms of your mortgage by documenting the circumstances surrounding your move out of the subject property.
In addition to any 3rd party paperwork such as the written correspondence from your renters breaking their lease, prepare a cover letter explaining that you had no intention of breaking the FHA streamline guideline of owner occupancy when you applied for the mortgage. Include why it made more sense to convert the rental into your primary home.
FHA Streamline Loan for Primary Residence vs Rental
But as a precautionary warning, no one should attempt to work the system for lower mortgage rates by saying they will live in a house that they actually intend to rent. That would be committing fraud.
In fact, lenders have the right to call a loan due-and-payable, impose fines, or raise interest rates should they determine that a homeowner falsified the intended occupancy status.
You may be wondering why lenders care whether or not you live in the property as your primary residence. Owner-occupied residences receive lower interest rates, mortgage insurance premiums, and closing costs. Generally speaking, homeowners can borrow more money based on the loan-to-value (LTV) ratio. This means to borrow the same amount of money, rental properties must appraise higher.
Or in the case of FHA streamline refinancing, investment properties are not required to have an appraisal. However this means the new loan amount cannot exceed the original amount, leaving less to be borrowed.
These underwriting guidelines are put in place to protect banks because statistically speaking, investment properties are more apt to go into foreclosure vs owner-occupied homes. So superior mortgage terms are reserved for principal residences.
Whether or not you decide to contact your lender about the occupancy agreement, your best defense is to make the mortgage payment on time, every single month. Hopefully, that in itself will alleviate the lender of doubt or concern.
Good luck and best wishes,
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