Question: We recently had a horrible experience at settlement when we purchased our home. When we made the offer, the sellers accepted our price and countered our offer with a three-month rent-back agreement. It seems that the house they were purchasing wouldn't be ready until three months after our settlement date. We agreed to sign an addendum saying that that they would pay us $4,650 to stay in the house for three months. Everything went smoothly with the lender until settlement. It seems there's a clause somewhere in the paperwork that says we must occupy the property after settlement so our settlement attorney wouldn't let us settle.

To make a long story short, after a long telephone conversation with the lender, we finally were able to settle after all parties signed a new addendum to the contract changing the rent back time from three months to two months. It doesn't make a big difference to us, but it greatly inconvenienced the sellers, who are really nice folks. Why on earth would a lender want to cause so much trouble at the last minute? I might add that the three month rent-back was disclosed in the contract all along. If they had a problem with it, you'd think they'd have said something before we're all sitting at the settlement table.

Answer: You'd think, wouldn't you? How a loan application can pass through the loan officer, the processor and the underwriter without anyone reading the sales contract is beyond me.

But let's get to the issue. You made application for a mortgage loan secured to a property to be owner occupied. The contract states that you will rent the property for the first three months. So, technically, this is a rental property for three months. Lenders won't make loans at owner-occupied rates for rental properties.

I know. You're thinking, "I'm just trying to help the seller out. I WILL be occupying the property!"

Before I explain the logic applied by many lenders, let me preface it by saying that I think you're lender did a poor job of handling this problem. The rent-back issue should have been addressed and solved well before settlement. Regardless, I think the lender should have allowed the three-month rent-back.

Here's the standard rule: Nearly all lenders will allow a rent back for the first 60 days, so it makes sense that your lender cut it down to two months. However, most lenders are flexible on this issue and will allow a rent-back to exceed 60 days if it makes sense and there is no evidence of fraud.

There's a reason that some lenders are strict on rent-back periods. Most loans are bought and sold from time to time on the secondary market. In fact, many mortgage banking companies will fund a loan temporarily and immediately sell it after it closes. Herein lies the problem. When your mortgage company sells your loan to another investor, it is warranting that at the time of the sale that the loan is secured by owner occupied property. If the sale occurs while you are still renting the property to the sellers, then it's technically not an owner occupied loan.

Lenders approach this issue differently. Some lenders are very strict and unyielding when it comes to rent-back agreements. Other lenders have more flexibility and will allow longer rent-back periods if it makes sense.

It seems that you got the worst of both worlds. Your lender is not only inflexible, but illiterate. A three month rent-back that's spelled out in the contract should have been recognized and brought to your attention that it was a problem long before the settlement date.

The lesson here, folks. Don't assume your lender knows everything. If there's anything unusual about your contract, bring it up immediately so any problems can be solved ahead of time.

Published: May 1, 2002

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, the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.