Finance Blog
Mortgage Lenders Cracking Down on Single-Family Rentals
Have you moved and decided to rent out your old house rather than sell it at today’s depressed prices? Are you renting out your vacation property? Did you buy a foreclosure or short sale with a residential mortgage and—after you fixed it up—begin renting it out while waiting until you can sell it and make a tidy profit? If so, you’re not alone.
Some 8 million Americans today own an investment property, but they don’t think of themselves as real estate investors, according to a recent survey. The financial returns on a single-family rental can be very attractive. However, if you are using a traditional mortgage to finance an income-producing property, you could be in for an unpleasant surprise.
Large numbers of homes today have been converted into rental units, making them commercial rather than residential properties. The Office of the Comptroller of the Currency, a federal agency that regulates all federally chartered financial institutions including banks, thrifts, and credit unions, recently ordered lenders to manage the financing of single-family rentals as commercial properties.
“Some banks manage IORR (investor owned residential real estate) loans in a similar manner to owner-occupied one- to four-family residential loans. The credit risk presented by IORR lending, however, is similar to that associated with loans for income-producing commercial real estate (CRE). Because of this similarity, the Office of the Comptroller of the Currency (OCC) expects banks to use the same types of credit risk management practices for IORR lending that are used for CRE lending,” stated the OCC bulletin issued September 17.
Lenders are now responsible for finding out if an owner has converted a property from owner-occupied to rental. Unlike a mortgage on an owner-occupied home, the primary source of repayment for a single-family rental is normally the rental income from the financed property supported by the borrower’s other personal income. Thus, lenders must put in place appropriate credit-risk-management policies and processes to cover loan underwriting standards, loan identification and portfolio monitoring expectations, and allowance for loan and lease losses.
What does this mean for borrowers?
If your bank did not write you a new loan when you converted your property to a rental, you may get a notice to do so. Your lender will request information on your rental income, including vacancy rates and rents, as well as information on yourself, such as credit score.
When you receive a commercial loan, you will end up paying a significantly higher interest rate than the rates that are available for mortgages today. You may be also asked to make a larger down payment that reflects the lender’s increased level of risk involved in financing a rental property as opposed to one occupied by the borrower.
Another option is to shop around for new financing from lenders who do not come under the OCC’s jurisdiction, such as a state-chartered bank or thrift. You may be able to find better terms, but your new loan will be a commercial mortgage.
Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.
Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.
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Anyone who gets a notice like this from their bank should fight like hell. Mortgage notes do not normally specify that the lender can accelerate the note if you eventually decide to rent out your house. If you bought the house as a rental and pretended you were going to live in it, that’s a different story. But lived there at least 12 months, then rented it out? I think not.
Anyone who gets a notice like this from their bank should fight like hell. Mortgage notes do not normally specify that the lender can accelerate the note if you eventually decide to rent out your house. If you bought the house as a rental and pretended you were going to live in it, that’s a different story. But lived there at least 12 months, then rented it out? I think not.
Each mortgage document will need to be reviewed individually. I have seen residential mortgages read that the lender has the right to call the note if the property is rented. I have also seen some that read that the owner must live in the property at least 12 months prior to renting to property, which is much more favorable language.
This will have a ripple effect. Rents will have to be increased due to the higher cost, making it harder on everyone – like that will help during this tough economy.
You’re right, it’s important to thoroughly read your mortgage document before signing. You should know the full terms to which you are agreeing. You don’t want to be surprised later. Thanks for posting.