HELOC on personal property before changing to rental: legal?

[Seo Hui Han]

Hey everyone,

My parents have recently told me that their house is too big for them (4 bedrooms) and they would like to downsize to a condo/townhome.  They don't want to sell their home, however, but would rather keep it and turn it into a rental property, esp. since it is in a very good school district.

Their current LTV is like 20%, very high equity. I am currently going through the numbers and trying to figure out how much it would rent for, what kind of maintenance reserve they should keep, etc..

I am attracted to the idea of opening a modestly sized HELOC as a "just in case." However, my concern is: would my parents be committing fraud by getting a HELOC, and then turning their primary into a rental just a few months later? Do we have to disclose this to the lender, either at the time we convert to a rental or even up front when we apply for the HELOC?