A friend of mine refied his owner occupied house 4 months ago. Now they have found a house that is closer to his wife's work and has better schools for there kids. They are thinking of turning their current house into a rental. And using a property management company.

A long time ago I heard that turning a property into a rental within a year of buying it could run in to mortgage fraud issues.

But I'm not sure of refi situations where they lived there for 5 years then refied.

No problem at all regarding the financing.

When I was applying for my third first purchase mortgage on single family homes I ran into a snag. My first home was a 3 + 2 with a pool. My Second was a 4 + 2. And my third was a 3 + 1-1/2 with a pool in a great area. When I applied for my 3rd loan, I told my lender that I believed I was going to reside in this house and I had two rentals. But I wanted to reserve the right to move into my other pool house after I did some major work on the new house. Making the small 1/2 bath into a 3/4 bath. Remodeling the kitchen. Adding a deck. And changing the central swamp cooler to central air.

To commit mortgage fraud, you have to do something you promised not to do or to have told the mortgagee information that you knew was false.

If I recall correctly (been a looooong time since I filled out a mortgage app!), there's a question on the form that says (sort of) "Do you intend to live on the premises as your principle residence?" This is asked to determine if the loan qualifies for owner-occupied status and all the perks pertaining thereto. At the time they refinanced, no doubt that was their intention, as evidenced by the fact that they did actually move in and live there.

Again, if I recall correctly, there is nothing that says you have to stay there. Double check the paperwork.

I get it. A lot of folks will tell you, "They'll never find out." So is someone never finding out a good reason to break your promise? Nope. That's a bad way to go thru life, lying to people whom you know (or hope) won't find out. Sounds like gutter-tenant behavior or an adulterer. "I'll sneak my pet/ex-con boyfriend in the home....the land lord will never find out." "I'll cheat on my spouse on business trips....he/she will never find out."

Do whatever the paper work says. We make the world a better place when we honor our promises to the best of our abilities, not whenever it is most convenient for us personally. My guess is though that they are probably okay to turn this current property into a rental, because the loan docs don't require them to stay put for a year.

Find out the truth and act on it with full good faith.

Sometimes there will be a statute which addresses certain issues which might not be specified in the loan docs. The statute might create a "safe harbor" that can be relied upon. Otherwise the issue might be open to interpretation and litigation that night include a burden of proof on one side or the other.

Good lawyers in this field should be familiar with this issue and be able to advise you properly. By the way, look for a definitive answer from the lawyer that can show you if possible why you should or should not make the decision to rent it out. Some lawyers will not have the proper knowledge and offer a worthless opinion with all sorts of "cover their a$$" conditions on their opinion. That type is opinion isn't worth very much. Your friend will sleep better knowing that this issue cannot come up in the future.

Unlikely, but you might even have a troublemaker tenant that thinks he can make a wild guess about the type of loan and try to use that to extort the property owner.

I would not rely on lender not finding out as the solution.

Update: My friend sent over a PDF of his lender docs. It has an Occupancy and Financial Status Affidavit.

Occupancy: Principal Residence.

Borrower either currently occupies and uses the Property as Borrower's principal residence or Borrower will occupy and use the Property as Borrowers Principal residence within 60 days after signing... Borrower will continue to occupy and use the Property as Borrower's Principal residence for at least one (1) year from the date that borrower first occupies the Property.