Conversion of Occupancy

Borrowers will sometimes want to convert a property from a primary residence to a secondary residence or an investment property after closing a mortgage loan on the primary residence. This can also occur when a borrower wishes to convert a secondary residence into an investment property. When a borrower does this, it may or may not be a problem.

When a borrower closes a mortgage loan, if the subject property is a primary residence, there is a clause in the Deed of Trust that states that the borrower intends to occupy the subject property for the loan for at least 12 months past the date of the closing of the mortgage. The key word in the clause is “intends.”

If a borrower moves into the subject property as his primary residence and then converts the property at a date after the initial 12 months, there is no concern. If, however, the borrower chooses to convert the property into an investment property or a second home within the first 12 months, it may or may not be considered a breach of the mortgage contract.

For example, if the borrower is transferring out of the area due to a change in their employment situation, this would not be a breach of the contract. The borrower intended to occupy the property, but due to the change, the borrower will no longer be able to occupy the property and he may either sell it or retain it as rental or second home. Another example would be a change in family size (addition of children or other dependents; divorce; or change in physical ability due to either illness or disability).

However, if the borrower is vacating the property for other reasons, it may be considered a violation of the mortgage contract, which could result in acceleration of the mortgage (foreclosure) as well as other legal remedies available to the lender. Examples of unacceptable situations would include but not be limited to:

  • Conversion of the property to rental for income or investment purposes
  • Conversion due to an unacceptable school district (borrowers are expected to carry out due diligence prior to the mortgage transaction)
  • Conversion for use as a second home
  • Conversion of the home for occupancy by a relative or other party (straw buyer)
  • Conversion of the property to commercial use, or destruction of the property for redevelopment

Just like a primary residence, a second home transaction requires the property to be retained as the borrower’s second home for a period of at least 12 months, although they may change this to a primary residence for themselves at any time.

Borrowers will sometimes inquire at the beginning of a transaction “how long do I have to live in the house?” for a primary residence or “can I put the property in the Airbnb pool or vacation rental?” These are “red flag” questions and the Loan Officer will investigate further to determine whether the borrower is misrepresenting their intentions regarding the property. As a side note, if a property is placed in a rental pool for temporary use for at least 2 weeks out of the year, the property is considered investment property. This would be a breach of the mortgage contract.

Occupancy is one of the primary risk factors when determining the acceptability of a mortgage loan application. Borrowers who misrepresent their intentions to occupy the subject property, either as a primary or secondary residence, open themselves up for many problems up to and including foreclosure; civil litigation; and, in extreme situations, criminal prosecution. For more information regarding occupancy related issues, please contact your Googain Loan Officer for more information.