Question: My wife and I are in the process of refinancing our Condo, which we intend to convert to a rental when we move into a new home. When we started the whole refi process, we were just “looking” at new housing developments casually. By the time we closed on the refinance (last Friday), we had already signed a contract to have a house built. The house should be done 3 months from now. There is a very good chance that it will be done on time (since this builder completes most houses in 80 days or so).

There were some documents in the refi package saying that you planned to make the property your principal residence, and had no intention to use it as a rental.

Well, we’re on shaky ground. We’re still using it as a residence, but are pretty certain it’s going to become rental. I’m feeling a guilt trip here, but I’m most concerned about the legal ramifications. Based on the legalese in the document, it makes it sound like you can lose the loan and be sent to jail, etc. etc.

Will the mortgage company find out and demand that we pay the full balance, or pay another 20% or 30% to bring the amount of equity up? Will they never find out and never care? Will they ask for an address correction from the post office (like when they send the end-of-year statement about interest paid) and jump on the case as soon as they realize our address has changed? You can tell I’ve got all kinds of scenarios running through my head.

Any comments about what mortgage companies do in this kind of situation, and what they rely upon for their source of information would be most appreciated.

Of course we’re also doing a loan for the new house, and the loan officer doesn’t seem to concerned about us refinancing. But will the new underwriter want to check on the state of our current mortgage and then choke when he sees that we’ve just refinanced? Our refinance is an FHA Streamline (long story why) and we have a three day period in which we can cancel the refi (losing all kinds of costs in the process I’m sure). We have until tomorrow afternoon. I’m seriously considering to cancel the whole thing and eat the costs I’ve incurred if this could really lead to a lot of trouble.

Thanks for any advice, comments, and tips,

Answer: Usually, a statement of intent has no legal force. (If on the other hand, the agreement says that you MUST occupy the property yourself, or else the loan will be called, then that’s different. But the clauses I’ve seen only speak of intent.)

My guess is you have nothing to worry about. Check your note carefully. When I got my house (1985) the interest rate was 12%, but there was an explicit clause that said that the interest rate went up to 17% if the house ever ceased to be my primary residence.

My friends mortgage had a similar limitation, but it was only in force for two years or so.

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