Is it okay to buy a first-time house as primary house, but end up not living in it?

Question

I'm planning to buy a house as a first-time home buyer, but I have no plans to live in it. I will be renting the rooms out.

Everything will be under the assumption that the house is my primary house (loan, home-owner insurance, etc.)

Someone told me that you can always label a house as a primary house if it's your only one, even if you never live there. I read something about being able to go to jail for this, is this true?

If so, can I avoid these risks if I live there for say only the first year?

Dave Toelkes · Answer

Just to add to what @Jon Holdman and @Steven Hamilton II already said. If you will be signing a Form 1003 (a standard loan application), and then submitting it to a federally chartered bank for loan approval, your strategy amounts to lying on your loan application with the intent to commit loan fraud. Since you applied to a federally chartered bank, your offense will be a felony. If convicted you may be residing in a federal government-owned gated community for up to a year, and ordered to pay up to $250,000 in fines. Not blurry at all. Read the fine print on the 1003.

Jon Holdman · Answer

If you're participating in some first time home buyer's program you need to understand their rules. Those may well have specific time limits that you have to stay in order to avoid penalties. Such as having to give back some of the assistance. No, its not blurry at all. You will sign documents stating you are intending to occupy the property. If you do not, you are lying. That gives the lender, the agency doing the first time home buyer program, and potentially the seller a reason to extract penalties. "Legality" may not be the correct term. You're signing a contract, but then violating the contract. That's usually just a civil (i.e., lawsuit by party A suing party B) matter. But in some cases where some government agency is involved it could be a legal matter ("the people vs. party B".) A key distinction being that "the people" can put you in jail where "party A" doesn't have that ability.

Ben Reiss · Answer

If you really do intend to move into the house for at least 1 year then this isn't an issue for most of the loans I have seen/heard of. Read the letter of the first time buyer paperwork. I bought a house that was my primary at the time. I finished some rehab and after 2.5 years realized I did not need a 4 bedroom 2.5 bath home as a single man. I had an FHA loan at the time and that was not an issue since I lived in it an it was my primary. When I moved out I turned it into a rental though. Which means I had to pay back the balance of my first time home buyers $7500 I received from uncle sam. I have heard of people moving into a new place every year to buy on OO rates and loans. I don't see an issue with this if you are actually following the rules. DO NOT LIE ON FHA loan docs. or any docs for that matter. But if you follow the rules I don't see an issue with using ti to buy a place that you would eventually rent out. I am a teacher and the Good Neighbor Next Door program lets teachers buy HUD homes for 50%. HUD gives you a second for the other 50% and pro rates it over 3 years. If after 3 years you move they don't claw it back. I have looked at this and if anything ever comes up I would want and I get a free $100K to live somewhere for 3 years I would do it in a heartbeat. But I wouldn't try anything over the 3 years. Follow the rules and make sure you don't get bit in the ass. No one ever expects to get caught. But it happens. Insurance is prob the thing people forget to change that even when done legally can bite you in the ass (forget to switch to landlord instead of OO on the right day and something goes wrong on that day). Just make sure you follow the letter of the law in this and don't take something in the spirit that could go to someone who is actually in need. If you are gonna move in and live there for the time period and just buy somehting that you would rent later I think you are safe. Ben

Steven Hamilton II · Answer

I will second what @Jon Holdman said. It is NOT Blurry at all.

Aaron Montague · Answer

Read the fine print of your mortgage, loan application and everything else you intend to sign VERY carefully.

Wayne Brooks · Answer

The general consensus is that after one year, you're fine. Just make sure to change your insurance.

Steve Skaw · Answer

Thank you for the responses. Now that I know this is a problem, I would like to ask if it's possible to live there for a few years, say 1 or 2, and then rent it out later? I would imagine this happens often, where somebody has to relocate from their primary residence, but don't want to sell their house due to market conditions and instead chooses to rent it out. What are the procedures when this happens? Do they have to tell the lender? If so, does it result in higher interest rates?

Aaron Montague · Answer

Here is how the IRS looks at it: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Sale-of-Residence---Real-Estate-Tax-Tips This should answer all of your financial questions. To @Curt Davis's point, the legality of doing what you are suggesting is blurry. I do not recommend it at all. Live in the place for a bit, rent the rooms you aren't using and move out later. At that point you'll have no issues.

Wayne Brooks · Answer

The severity of the repercussions will partly depend on who you're lying to . The seller of an REO-voiding of the sale, fines, jail, etc. Your lender/insurance co.--denial of an insurance claim, mortgage fraud, etc.

Curt Davis · Answer

Steve, this is not really ethical. You can also get into big trouble. Might want to do some research on the consequences should you get caught. Why not just buy a home to actually live in? IF your doing this only bc you dont have any money to really put down then you probably should not be investing.