Many homeowners are looking to renting their current property in order to make a move. We must all keep in mind that this may not be as simple as it seems. Our Clients need to be informed of the potential risks involved. Most homeowners carry a mortgage that is intended for their primary residence. In most cases, one cannot simply rent their property. Lenders take mortgages based many factors. One of which is the fact that the secured property will be the primary residence and the borrower will live there. If a buyer intends to rent or lease property which they have purchased, the buyer would usually require a different type of mortgage, like a Commercial Mortgage for one example. Different rules and rates will most likely apply for investment-type loans.
Most residential mortgages contain an Alienation Clause and an Acceleration Clause.
Acceleration Clause: A provision in a Security Instrument (Mortgage) that allows the lender to declare the entire debt due immediately if the borrower breaches one or more of the provisions of the agreement.
Alienation Clause (a.k.a. Due-on-Sale Clause): A provision in a Security Instrument (Mortgage) that gives the lender the right to accelerate the loan if the borrower sells or transfers a significant interest in the property without the lender’s approval.
A significant interest in a property can be considered the "Right of Possession." When renting, the owner surrenders that right to the tenant. This may trigger the Alienation Clause, which in turn may trigger the Acceleration Clause.
We licensed Real Estate Professionals must provide this information to our clients. It is my strong opinion that a client is to be informed that they should contact their Lender before they rent their property. Additionally, a call to their Homeowners Insurance Provider to see if any additional riders need to be purchased to protect the property while rented is in order. While at it, it would be a good idea for them to contact a Tax Professional as well to review the implications of rental income on their overall tax position. Perhaps having a form that states information such as this that your client can acknowledge would be a good plan. Talk to your Principal Broker or attorney about this.
If these issues are not properly conveyed, a client could very well end up in a terrible position. Then whom do you think they will look to for blame and/or restitution? YOU!
