Help me get to grad school without loosing my house!
August 18, 2010 8:27 AM   Subscribe

How to manage my mortgate and insurance while I am away from my house for an extended period?

I am going back to grad school in 3 weeks and will be moving to another state for ~2 years. I own a house (have ~20% in equity), and am keeping it. I will be making a small stipend at school, but I have sufficient savings to cover the mortgate for the time I am gone. I am in the middle of refinancing the house, and should close in a few weeks (before I move). The bank does not currently know I am taking a leave of absence from my job and moving. I signed a statement at the bank indicating the house is my primary residence, which I consider to be true, since we are only temporarily relocating, and plan to move back.

I am having a coworker rent my house for the first ~6 months while he is building his house, and afterwards hope to rent to someone else. They are paying me rent. If it matters, I theoretically could swing it without rental income, but obviously it makes things much easier financially.

My problem is that I just discovered that my homeowners policy is invalid if I am absent from the house for more than 60 days. I can get a new policy for landlords, but the bank will be notified of the change, and I suspect this will be incompatible with my loan terms. I can wait to make the insurance policy change until after I close on my refinance, but I don't know what will happen once they discover I got a landlord policy.

In theory, I could get a loan designed for a rental property, but I'm worried that I likely wouldn't qualify for the loan if they knew my current income was about to end for a few years. (I am not quitting my job, but taking an educational leave of absence. I have a job whenever I come back if it matters)

Do I have any other options? Should I just spill the beans with my loan officer and ask him what my options are? What should I do?

Note that I am not asking how to break the law or act unethically. However, I asking anonymously just to avoid any possible complications and not broadcast my situation. Throwaway email:
posted by anonymous to Work & Money (6 answers total) 1 user marked this as a favorite
I am not your lawyer, and this is not legal advice. But it just so happens I was talking with a mortgage officer on Monday morning, and asked what happens if I move out and rent the property to a tenant, and he responded that 1) the bank usually doesn't find out if this is the case (though we didn't discuss the insurance question) and 2) it often works out that the owner refinances to take equity out to buy a new residence immediately before moving out and renting residence 1, and that this is done with full understanding by all the parties. So, at the end of the day, based on that one conversation with my mortgage guy, I'd go to the bank and let them know.

This was Wells Fargo.

Again, not legal advice, and YMMV.
posted by Admiral Haddock at 8:40 AM on August 18, 2010

It sounds like the house is currently your primary residence. Assuming the refinance closes before you move, you won't have lied unless the loan agreement stipulates that the house remain your primary residence for some length of time.

It does sound like you need to get appropriate insurance when you move / rent the place out. Violating the terms of your insurance effectively leaves the property uninsured, which is dumb for you to do and also almost certainly would violate the loan agreement.


I have a job whenever I come back if it matters.

So far as you know...
posted by jon1270 at 8:42 AM on August 18, 2010

Define "away." How often would you return to do maintenance, interview prospective tenants, etc.? Does an authorized guest or renter count as your presence? I've had to get vacant property insurance, but the homeowners policy I had allowed tenants and subleasers (iirc). If you don't qualify, change policies after you close on the loan.
posted by slidell at 8:49 AM on August 18, 2010

In Texas, virtually all Deed of Trust instruments on normal (i.e. not a specially-negotiated contract between a sophisticated investor and a specialty bank) property financing have terms similar to the following:

Grantor assigns to Lender...all present and future rent...from the Property. ... Grantor may, as Lender's licensee, collect long as Grantor is not in default under the Note or this deed of trust. Grantor will apply all the payment of the Note and performance of this deed of trust, but if the rent...exceed[s] the amount due under the Note and deed of trust, Grantor may retain the excess. If Grantor defaults in payment of the Note or performance of this deed of trust, Lender may terminate Grantor's license to collect rent...

Grantor, in this case, would be you because you would be agreeing to--or granting--the bank having a security interest in the property.

I mention this because the banks know that privately renting out a property is going to happen, is generally allowed as a concept of property ownership, and is not worth the trouble of tracking. They are covering their collective behinds, and realize that trying to contractually restrict you from renting your property is both fraught with peril (might be declared unreasonable by a court) and financially unwise (takes away a foreclosure mitigation option the owner might consider).
posted by fireoyster at 9:30 AM on August 18, 2010

Out of curiosity, what's the maximum amount of time after closing that a lender might wait to verify employment?
posted by jpdoane at 4:16 PM on August 18, 2010

I agree that you should let the refinance close, then arrange for your insurance policy to change when your tenant moves in.

When we bought a second house and rented out what had been our primary residence, I asked a loan officer at the credit union that holds our note if I needed to change the terms of our loan--he said no. You're going to school, which is not a permanent change, and have intention to come back to the house, which I think is reasonable justification to claim that it really is your permanent residence. (Be aware that if that changes, there can be tax implications when you sell if you haven't been residing there...)

It's great that you have lined up an initial tenant that you trust. I strongly urge you to also line up someone trustworthy to manage your property--to keep an eye on it, to respond in your place in case of emergency. This will cost you money, but can save you a lot of heartache in the long run. Also, your new insurance policy will be a lot less expensive than your owner-occupied property homeowner's insurance, which can offset the cost of management a bit.

Good luck in school, and good luck with being a landlord!
posted by Sublimity at 4:20 AM on August 19, 2010

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