Bought home with 10% down (conventional), want to buy another home with conventional 90 days from first home?

Question

I bought a home with 10% down using a conventional loan. It was owner-occupant deal from the bank (not FHA). I have lived in this home for about a month or so now, but found a better property 10 miles away - and I would like to buy it as my primary residence with 10-15% down (not 20%) using conventional loan with a different bank from the first home.

Questions:

1. Is this possible? 
2. Will the second bank ask my owner-occupancy clause from first bank or simply focus on my income to debt ration? Does the 2nd bank even care if the first home is owner-occupied or not? Remember, neither loans are FHA.
3. Will the rate and down-payment for 2nd home mortgage be a primary residence rate or investment rate?

Couple of things to note:

1. I'm well within my income to debt ratio to afford both properties. In fact, it's 25% total front-end expense of my monthly income (limit is 38%), back-end is fine.
2. My credit scores are in the 750 range.
3. The first bank hasn't started reporting my first mortgage as a credit line on my credit reports yet. I have a pre-approval from 2nd bank for the 2nd mortgage already.

Thank you, Thank You, Thank You!

Mo Sammy · Answer

So my city auditor's website is reporting the first home under my name today as "non-owner occupant". Under the owner address, it has my previous address, which is the same address I provided to the second bank, a condo I was renting.

On paper, this means my current primary residence is the condo I was renting and I can work with the second bank as a client who is looking for a primary residence, therefore I could put less down for the 2nd home, and not 20% as I initially thought.

Do I still stand a chance of buying the 2nd home as a primary residence?

David Krulac · Answer

Mo Sammy

The first mortgage was probably not a portfolio loan.  If it was you could try to go to the first lender, explain the circumstance and ask for a written permission to get out of the owner occupant obligation.  With a portfolio lender they give permission maybe with a payment?

But the first mortgage was probably a conforming mortgage sold on the secondary market to Fanny or Freddie.  That being the case there is no way to unwind that deal short of either:

1.  selling the first property and paying off the first mortgage or

2.  refi to an investor mortgage at a higher rate and higher down payment.

There has been a lot of fraud in this area, where borrower say that they are going to live in the property and sign a paper that they will do so for at least a year, that the penalties have grown over time as well as the prosecutions.  For any mortgage involving the Federal government, like FHA, VA, USDA, Fannie, or Freddie the penalty is 5 years in jail and a $250,000 fine.

An easier course of action is to buy the second property as an investment property, rent it out and after a year or what ever time you agreed to,  has passed move from house 1 to house 2 and rent house 1

Lynn McGeein · Answer

If you mean you are shopping around for loans for your second home and have decided to apply at 2 different places, they would know when they pull your credit report and see the inquiries.

If you mean will your lender on your first home be told by the lender for your second home that you are buying another primary residence, I don't know, but I would guess it's not standard.  I do know that you will have to change your homeowners insurance, and that will be a flag for the mortgage company.  Also, the second lender will see the first property on your credit report, either at application or when they check it right before closing, and will need an explanation.

Mo Sammy · Answer

Also, do banks share mortgage contracts from their clients, and see if a customer has applied for another mortgage loan?

Mo Sammy · Answer

Thanks Lynn.

I will stay on my current plan, and obtain the second conventional loan as primary residency, since the second bank and first bank are not the same and may not contact each other about the first home owner-occupancy clause.

The second bank has not asked me if I have another home, they are purely making decisions on my credit reports and financials.

Bottom line, I can afford both homes, I just want to avoid paying higher down payment (20%) for second home.

Lynn McGeein · Answer

While it is rare, the original lender may actually enforce the owner-occupied provision, and I've read on these forums that a few have actually had to obtain new investor financing (I'm assuming additional expenses of obtaining new loan) to replace the owner-occupied loan.   If you are comfortable doing that if and when the original lender pushes it due to you moving so soon, then you have much less to worry about.  As far as contacting the lender first, that would be up to you, but if I was going to, I would do it before I bought the second one.  When I called our lenders about transferring investment properties to an LLC, they simply told me they have the right to enforce the due on sale clause for transfer, but would not say whether they would or not.   We chose to forget the LLC and just get a large umbrella policy as we could not pay the loans off with short notice if they ever forced the transfer clause.  Many people choose to go ahead with the LLC.  I'm just pointing out that knowing potential consequences will help you make a more informed decision about whether to proceed with the 2nd home purchase.

Mo Sammy · Answer

Thank you both.

Lynn: how would I turn the first home to an investment property after living in there after just 1 month? I paid 10% down with conventional loan, do I call the bank back and ask them to turn the property to an investment loan and pay an additional 10%? Or pay a new 20% down? I don't mind doing this, but not sure if this requires a new closing process?

I will read my closing documents later today and see what the exact owner-occupancy clause says.

Thanks again.

Lynn McGeein · Answer

In your closing documents on the first home, there should be the requirements for owner occupancy that you agreed to in order to obtain that loan and potential actions if not followed.  If you have enough money set aside and can quickly convert the 1st property to an investment loan (higher down payment, higher rate) if it's called, then I would feel more comfortable about going forward with the next property.   It's unlikely anything would happen, but if you are not prepared in case it does, it could turn into a real problem, and the lender will find out when the insurance changes.

Mike D'Arrigo · Answer

Mo, I see a couple of potential issues due to the recency of the purchase of your primary residence. The second bank is not going to care about the owner occupancy status of your first home, however, the lender on that home will. You undoubtedly got a lower owner occupant rate. If the lender discovers that you are no longer living in it after just 1 month (and they can find out), they will most likely adjust your rate. Being that you have hardly lived in the first home, you shouldn't have much problem showing the lender on the second home that it will be your primary residence and that the first home will be investment. This however assumes that the new home is at least as nice or nicer than the first home. Although your lender has already run a credit report, they may very well rerun it again before closing at which point the other mortgage may show up. It doesn't sound like your DTI ratios will be a problem however.

Good luck with everything.