Doctors Loan/Conventional Loan = You Must Occupy the Property forever?!?

[Andrew Pierce]

Hi BP Mortgage pro's,

theoretical scenario: a doctors loan was used to buy a primary residence rental portfolio piece, while talking with the loan officer @ big bank name about how it would be used as a rental portfolio piece after eventually moving out.  Then a couple years later, discovered that a piece of paper was signed at closing which was never read and in fine print says something about the home being owner occupied throughout the duration of the mortgage... wtf?   

Is that necessary terms for all doctors loans?   Does that make any sense to put in a 30 year loan package, or standard by any means?  I thought all 30 year mortgages require only 12 months occupancy.

It seems to be a lose-lose since the lender loses the interest on an otherwise good loan if it had to be sold, and they gain nothing.  Or if they already sold it on the secondary market, still, what could be the reason for this having been added into the fine print?

[Erik Estrada]

Was this a conventional Fannie/Freddie Mac loan? 

[Patrick Roberts]

Most Doctor loan programs are portfolio loans which the lender (almost always a local/regional depository institution) holds internally on their balance sheet. These are usually not Conventional conforming loans (Fannie/Freddie). The banks do this because they want the banking relationship with the future HNW (high net worth) client and therefore make special loans to accomplish this. It's highly likely that this is the case and that one of the covenants for this loan was that it has to remain your primary residence while the loan was in place. Your loan agreement will ultimately dictate what you can and can't do with the property. 

[Andrew Pierce]

Thanks for your responses Erik and @Patrick Roberts !  I think it was conventional of the type Patrick described. 

The loan officer was aware borrowers planned to use it as a portfolio rental so the only thing this "special loan" would accomplish is burning the relationship.  Thus a win for them would be to void that term, right?  Even though interest rates have gone up 1%. What would be the right way to approach the bank about this, and who at the bank could void this term of the loan agreement? 

BTW, the closing was done remotely by one of the 2 borrowers, and they explicitly limited the power of attorney to only what was "Necessary" to execute the loan.  Since it was discussed with the loan officer the borrowers were seeking to create rental portfolio assets, they likely knew the borrower who was not present at signing would not have signed that, but apparently the one who was there signed everything presented to her to the point of her hand cramping, without being aware one of those signatures countered their plans for the purchase.  So I doubt it would be enforceable unless the doctor loans "necessarily" include that term.  But I don't know how a legal dispute with the bank would pan out and would avoid that if at all possible to just approach them politely and have them void it.  Any suggestions for how to handle this and still turn it into a rental (it will cashflow) are greatly appreciated!

[Patrick Roberts]

Quote from @Andrew Pierce:

Thanks for your responses Erik and @Patrick Roberts !  I think it was conventional of the type Patrick described. 

The loan officer was aware borrowers planned to use it as a portfolio rental so the only thing this "special loan" would accomplish is burning the relationship.  Thus a win for them would be to void that term, right?  Even though interest rates have gone up 1%. What would be the right way to approach the bank about this, and who at the bank could void this term of the loan agreement? 

BTW, the closing was done remotely by one of the 2 borrowers, and they explicitly limited the power of attorney to only what was "Necessary" to execute the loan.  Since it was discussed with the loan officer the borrowers were seeking to create rental portfolio assets, they likely knew the borrower who was not present at signing would not have signed that, but apparently the one who was there signed everything presented to her to the point of her hand cramping, without being aware one of those signatures countered their plans for the purchase.  So I doubt it would be enforceable unless the doctor loans "necessarily" include that term.  But I don't know how a legal dispute with the bank would pan out and would avoid that if at all possible to just approach them politely and have them void it.  Any suggestions for how to handle this and still turn it into a rental (it will cashflow) are greatly appreciated!

Regarding who to talk to, I would start with your loan officer and then escalate to their manager. 

As for your second paragraph, none of this will matter. If the borrowers signed the loan agreement, they agreed to the terms. If one of the borrowers granted POA, then they won't have any argument- this is literally what the POA is for. Agreeing not to rent the property per the loan terms is absolutely "necessary" to getting the loan; no agreement, no loan. Not understanding/not realizing a condition exists is unlikely to work as a defense. The loan agreement will be very enforceable unless it violates a regulation/law: if you want the bank's money, then they get to set the rules. If you don't like the rules, then you have to get the money from somewhere else.

The best pathway here is to refi the existing loan into a loan that allows investment property use. 

[Andrew Pierce]

@Patrick Roberts thanks for your helpful insights.  Would you mind answering my question at the end of this paragraph (2nd to last sentence) sorry I typed a lot of other stuff you don't need to read..
I never would have thought a conventional loan at a big bank would have such twisted fine print.  just really disappointing that the loan officer knew we wanted to rent it out and when the real estate savvy guy wasn't there, made the other buyer sign something preventing that.  she was rushed taking off from work, with the sellers and everyone there, and not in a position to read everything let alone negotiate a change of closing paperwork.  they will lose a ton of interest on 5.5% loan if we refi with someone else, but it would likely be 7% so its a lose-lose, they will lose our business and it could be in their favor to just drop the abusive term, ridiculous that a conventional loan doesn't let you keep the place after moving out. never saw that coming and this type of "pulling a fast one" is exactly why the other buyer who couldn't be present on closing specified that the power of attorney for signing closing documents was limited to exclude anything unnecessary.  This would clearly exclude a ridiculous term which is not included in other conventional doctor loans by default, especially given the understanding that we were investing in real estate and doing rental investing, not just buying a temporary place to stay.  If this isn't clear enough, one could survey the other bank loan officers and see if the other doctor notes included this term around the year the loan was written, if this is one of only a few outliers which they threw the term in for, then any jury would likely conclude it was unnecessary and the power of attorney would make that void... but they as you say if the bank makes all the rules for their conventional since it's not "conforming..." then they could call the loan due and as you said the refi would be needed regardless.  but there is case law that allows you to break some terms of a mortgage agreement if something is unenforceable, for example the sub-to community relies on the Supreme Court cases which say it's not required to notify the lender when you transfer the deed/title.  This would also likely be unenforceable due to no authority to sign such an unnecessary piece of paper onbehalf of the remote buyer.  Assuming the bank has the loan on their balance sheet (not resold), would they want to call it due if the interest rates only went up by 1.5% since the time of closing?  they probably have a bunch of 3% nonconforming loans on their balance sheet so 5.5% is not bad, totally reliable payments, plus in a legal battle they'd likely find the power of attorney didn't extend to the ridiculous term and that there was no breach of any enforceable agreement. 

[Stuart Udis]

@Andrew Pierce Where to start....first the high levered physician loans are intended for owner occupants. The policy consideration behind the higher leveraged loans is to provide financing for individuals who have high earning potential and are at the start of their career where the earning potential has not yet materialized and perhaps are dealing with the added burden of student loans. Lenders are not giving out these loans to help doctors create rental real estate empires. To respond to some of your other points.

1. If there are two borrowers, then of course if a POA is used it would be limited to one borrower...If both borrowers were available and/or decided to attend they would both sign the loan and therefore no POA.

2. Did the POA confirm the interest rate, loan amount? term of the loan? address encumbered by the instrument? Are those terms "fine print" or only the terms that POA did not read?

3. Do you really believe the lender snuck in terms knowing you, the "real estate savvy" one was not present"? These are boiler plate loan agreements that are consistent with the loans underwriting requirements. Furthermore, these are not the types of loans that get re-negotiated, especially at closing. 

4. You say the POA was made to sign the loan. Did they hold them up at gun point?

5. The owner occupant term is not "abusive" as you put it. It achieves the very policy consideration behind the loans in the first place. I caution you not to threaten to take your business elsewhere. If they are able to remove the term it will be dependent on the loan underwriting requirements, not because they want to keep you as a banking customer. Perhaps they offer a favorable refinance option if the property has appreciated to the point where the current loan amount satisfies their non physician loan LTV underwriting. However by your own admission this is a large bank. They don't care about a one off doctor's banking business. You are nothing but a rounding error to their depository relationships and you are likely not getting special treatment.

6. You can keep the property once you move out, you just have to refinance the loan. Very different than the way you are construing the situation as having to occupy the property forever. 

7. You assume the owner occupant term is not enforceable...what are the legal grounds for that? If you believe you are going to create new case law.....I wish you even more luck....Doctor who is given 100% financed loan creates new legal precedent arguing the loan has "ridiculous terms"....I don't think so

[Patrick Roberts]

Quote from @Andrew Pierce:

@Patrick Roberts thanks for your helpful insights.  Would you mind answering my question at the end of this paragraph (2nd to last sentence) sorry I typed a lot of other stuff you don't need to read..
I never would have thought a conventional loan at a big bank would have such twisted fine print.  just really disappointing that the loan officer knew we wanted to rent it out and when the real estate savvy guy wasn't there, made the other buyer sign something preventing that.  she was rushed taking off from work, with the sellers and everyone there, and not in a position to read everything let alone negotiate a change of closing paperwork.  they will lose a ton of interest on 5.5% loan if we refi with someone else, but it would likely be 7% so its a lose-lose, they will lose our business and it could be in their favor to just drop the abusive term, ridiculous that a conventional loan doesn't let you keep the place after moving out. never saw that coming and this type of "pulling a fast one" is exactly why the other buyer who couldn't be present on closing specified that the power of attorney for signing closing documents was limited to exclude anything unnecessary.  This would clearly exclude a ridiculous term which is not included in other conventional doctor loans by default, especially given the understanding that we were investing in real estate and doing rental investing, not just buying a temporary place to stay.  If this isn't clear enough, one could survey the other bank loan officers and see if the other doctor notes included this term around the year the loan was written, if this is one of only a few outliers which they threw the term in for, then any jury would likely conclude it was unnecessary and the power of attorney would make that void... but they as you say if the bank makes all the rules for their conventional since it's not "conforming..." then they could call the loan due and as you said the refi would be needed regardless.  but there is case law that allows you to break some terms of a mortgage agreement if something is unenforceable, for example the sub-to community relies on the Supreme Court cases which say it's not required to notify the lender when you transfer the deed/title.  This would also likely be unenforceable due to no authority to sign such an unnecessary piece of paper onbehalf of the remote buyer.  Assuming the bank has the loan on their balance sheet (not resold), would they want to call it due if the interest rates only went up by 1.5% since the time of closing?  they probably have a bunch of 3% nonconforming loans on their balance sheet so 5.5% is not bad, totally reliable payments, plus in a legal battle they'd likely find the power of attorney didn't extend to the ridiculous term and that there was no breach of any enforceable agreement. 

 First, this is not a Conventional loan. There is no Fannie/Freddie "Doctor loan". This is bank loan that this depository institution made to you using depositor funds. They have simply labeled a particular mortgage loan as a "doctor loan." Most regional banks have them, and they are all slightly different.

Secondly, the bank has every incentive to call this loan if you violate the terms. Fixed income, like lending, is not purely about yield from interest charged. It is focused on yield at a given level of risk. Primary residence loans are less risky than investment property loans, which is why they have more favorable terms than investment property loans. Depository institutions are highly regulated in the risk they bear because they lend out their depositors' money. They cannot arbitrarily make wild gambles because they feel like it - they have to operate within established risk parameters that are approved by several regulatory bodies and internal controls. Having a loan in technical default on their books is very bad from the regulatory perspective. After the banking failures early last year and the current razor's edge of the banking environment, you had better believe that regulators and banks are hyper sensitive to any potentially bad assets. Theyre under the microscope right now.

At the end of the day, I don't what else to tell you other than you are wrong here. The loan agreement and covenants dictate the rules of the contractual agreement. What is "unnecessary" and "ridiculous" are completely arbitrary - what you view as an "unnecessary" clause about primary residency is likely very necessary to a bank that does not lend on investment properties under the terms of the loan you are getting. The lender is under no obligation to provide you a loan on your terms - if you want the particular loan program, then you have to agree to the program terms. I'm not aware of any doctor loan anywhere that allows for use as an investment property; generally speaking, that's not what they are intended for. 

If you didn't want to be bound by the terms of the loan, which is set forth by the written loan agreement and mortgage documents (and not what your loan officer told you), you shouldnt have agreed to the terms and taken the loan - you shouldve gotten a different loan. Your recourse here is to A) talk with the bank and see if an agreement can be reached, B) refi out of the current loan into a new loan for investment property usage, or C) sue the lender and see what happens. If you go in talking about unenforceable terms and lawsuits, then Option A goes out the window very quickly. I'm not trying to be mean, just giving my opinion that you likely don't have an argument here. 
 

[Andrew Pierce]

Thanks guys. These last two comments mirror my thoughts. Just wanted an outside perspective. I am not making any conclusions just doubting, as previously mentioned, if a 30 year conventional mortgage (nonconforming, but standardized within the banks operations somewhat), necessarily excludes renting it out. I had doubts and still have some but now it sounds like those may have been necessary for their loan program after learning why it's a lower risk and FDIC insured requires that. So thank you. Just frustrating since I was not there and didn't agree to that term and if I saw it would have canceled the closing, and I think the loan officer could have assumed as much since much of our phone conversations surrounded investing and rentals. Of course the worst case is actually getting lawyers involved and I wouldn't go that route I just wanted to make the basic contract law argument about the PoA's limitation. Yes it explicitly allowed things like the term and rate, and I wrote that it should exclude anything additional which is unnecessary since I couldn't be there to read the closing docs themselves (which I assume can vary depending on what the branch leader/loan officer wants for the nonconforming loan).

[Andrew Pierce]

btw that was an amazing suggestion to see if they could refi favorably out of that term.  would be amazing I will definitely check, thank you for the perspectives!  edit: by "actually get the lawyers involved" I Meant having to litigate against a big bank. Ha. 

[Patrick Roberts]

Quote from @Andrew Pierce:

Thanks guys. These last two comments mirror my thoughts. Just wanted an outside perspective. I am not making any conclusions just doubting, as previously mentioned, if a 30 year conventional mortgage (nonconforming, but standardized within the banks operations somewhat), necessarily excludes renting it out. I had doubts and still have some but now it sounds like those may have been necessary for their loan program after learning why it's a lower risk and FDIC insured requires that. So thank you. Just frustrating since I was not there and didn't agree to that term and if I saw it would have canceled the closing, and I think the loan officer could have assumed as much since much of our phone conversations surrounded investing and rentals. Of course the worst case is actually getting lawyers involved and I wouldn't go that route I just wanted to make the basic contract law argument about the PoA's limitation. Yes it explicitly allowed things like the term and rate, and I wrote that it should exclude anything additional which is unnecessary since I couldn't be there to read the closing docs themselves (which I assume can vary depending on what the branch leader/loan officer wants for the nonconforming loan).

 Overall, it sounds like this whole thing stemmed from a communication or integrity issue that occurred at the loan officer level. I think a conversation with the loan officer's manager to see if a compromise/alternative can be worked out may be beneficial. 

If I was the originator on this loan (loan officer, lender, or whatever title is used), I would have made this restriction very clear to my borrower if they had explained that they wanted to eventually use the property as a rental. This is part of my loan process - a discovery and strategy session with the client to understand their scenario, future plans, and overall situation so I can structure the loan to fit into it. 

More than likely, the loan officer on your file either A) didnt know their own product very well, or B) glossed over this aspect in order to get the loan to closed due to a lack of integrity. This is why I always hate on big banks for mortgages - while this kind of thing is not exclusive to them, it tends to happen with them at a much higher frequency.