A rental property rule you can't break

A rental property rule you can’t break

Circumventing the required 20% down payment is a bad idea

(mstay/Getty Images)

(mstay/Getty Images)

Q: I want to buy a rental property, but don’t have enough for the 20% down payment required. If I buy it for personal use with a 5% down payment, how long do I have to live in it before I can rent it out?

A: Allowing a child to play with matches is a really bad idea. This plan is also a really bad idea. The 5% down option is intended for people who plan to reside in their home and “should never be used as a way to circumvent the required 20% down payment for a rental property” says Sue Pimento of Mortgage Alliance. She goes on to say that moving in just temporarily “could constitute this mortgage transaction as fraudulent” in the eyes of your lender and insurer. A relocation for work or a marriage breakup might require that you rent out your existing home, but it comes down to your intention at the time of purchasing the home. There is no period of residency that will suffice. If you intend on renting it out, you need to come up with the required down payment, and if you flout the rules you risk getting burned.

Bruce Sellery is a frequent guest on financial television shows and author of Moolala. Do you have your own personal finance question? Write to us at [email protected]