Leasing out my condo instead of selling

Question: I took out a Mortgage 3 months ago for a condo with full intentions of occupying it myself. However, due to a death in the family, I inherited my parents’ house. If I went back to live in that house and leased my condo, would this be illegal?

It would not be "illegal," but it may be in violation of the terms of your mortgage. Most lenders price their loans differently for investment properties than for those that will be owner-occupied.

You would have signed a document indicating your intention to occupy the property at the time of taking the loan. There are three likely possibilities:

First, the lender doesn’t find out that you don’t still live in the property. Are you getting mortgage statements at that address? It could be something as simple as this that might make the lender aware.

Second, they find out, but give you a pass because your reason for not living in the property is a reasonable one. Maybe it was an unexpected hardship that prevented you from occupying the property. If your intent at the outset had been to commit what technically is lender fraud, you would have put a tenant into the property at the close of escrow which is fraudulent. Being able to document an unforeseen circumstance is paramount, which seems easy in your case.

Third, the lender finds out and demands full repayment of the loan. This isn’t something that would happen instantly. There would be a series of notices with increasingly stronger language until they issued a repayment demand. Your options at that point would be to sell the property or refinance it with a non-owner-occupied mortgage. Non-owner loans generally carry a higher interest rate than owner-occupied loans and might require that you pay down the principal balance when refinancing.

However, I think this is the least likely of the three possibilities given your situation. No lender wants to foreclose until absolutely forced to; it is ultimately a losing proposition for them. The important thing for you to realize is that you have not intentionally committed fraud. You clearly intended to occupy the property. All of this is not to say for certain that you won’t have to explain things to your lender or have to re-write your loan. But it’s not illegal. It’s not like the cops are going to show up at your home and perp-walk you in cuffs to the station for booking. But a quick conversation with a lawyer would be time (and money) well spent to give you some peace of mind. As always, working with a trustworthy lender can help navigate through these issues.

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