Will Bank Modify the Mortgage on Rental Home?

Dear Real Estate Adviser,

I've been laid off but have found work in another state where I have relatives. But I would like to keep my townhouse, which is now in foreclosure, as a rental property. How likely is the bank to modify my mortgage for this purpose?

-- Alberta

Dear Alberta, Not very. Banks haven't exactly been rushing to modify loans these days for numerous reasons, and it's quite unlikely your bank would convert your in-default mortgage at this point to a business/investment loan for a rental.

That said, thousands of distressed U.S. homeowners are going this route without notifying the lender, rationalizing that they have nothing to lose. If you do have an owner-occupied mortgage, which is very likely (check the paperwork), the bank could conceivably call that loan if they discover you converted the place into a rental, though it would have little motivation to do so because of the revenue stream. You would definitely need to let your insurer know what's going on, however, so you can change the policy to either a non-owner-occupied status or a landlord/fire policy.

I can't come right out and advocate that you do this because of the potentially tenuous position in which it can put your renters. If you do it, though, at least alert the prospective tenants of the home's status but assure them they now have some protection under the Protecting Tenants at Foreclosure Act of 2009, a federal law which allows renters to stay in a foreclosed home for the duration of their leases. Tenants on a month-to-month lease can stay put at least 90 days from the date they receive an eviction notice under the law. It's also worth knowing that rents are on the rise nationally while home values are not, so investors have been vigorously snapping up cheap foreclosures to make them rentals.

First, though, ponder these issues. How much of a loss, if any, can you suffer each month between what you'd get in rent and the requisite mortgage payment? That might determine how viable this scenario would be. Moreover, are you sure you want to become an absentee landlord? That is, can you afford to hire a property management company or at least someone competent to administer the property and make repairs (on your dime) when something major such as the central air conditioning breaks down? Given your situation, the answers are probably no. Plus, some unsavory tenants of foreclosed rental homes will presume that the owners don't have the financial wherewithal to evict them and try to stay rent-free for as long as possible.

Certain banks, by the way, are rolling out a different version of the foreclosure-to-rental conversion program in select markets. Bank of America, for one, has announced it is forgiving the mortgages of some distressed borrowers in Arizona, Nevada and New York in return for a deed in lieu of foreclosure from them. The bank then rents the houses back to the in-arrears occupants for a while before selling the properties to investors. The Federal Reserve is encouraging these deals by offering Community Reinvestment Act credits to banks. Because you're moving, this wouldn't apply to you.

Good luck in your decision and your new job and home!

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