When you submit your mortgage application you are required to indicate if the property you are buying is your primary residence or a rental property. A mortgage on your primary residence, a second home or a vacation home is an owner occupied loan whereas a mortgage on a rental property is a non-owner occupied loan.
If your mortgage is classified as owner occupied, then you are usually required to live in the property for at least one year after your refinance closes. In some cases, you are only required to occupy the property for six months after closing but this is relatively unusual.
We recommend that you review your loan documents to understand how long you are required to live in the property and to determine if the lender charges you a penalty if you move out sooner. Although this is somewhat uncommon, some loan documents contain a provision that permits the lender to charge a significant fee if you move out and rent a property too soon after closing a mortgage that was supposed to be on your primary residence.
If you intend to occupy the property for at least a year and you may or may not rent the property in the future at the time you apply for the refinance, then you should select primary residence on your loan application. If you fully intend to rent out the property after your refinance closes, especially within a year of closing, then you should select rental property on your application.
Please note that if you indicate on your mortgage application that the property being financed is your primary residence but you never planned to live in the property and always intended to rent it out, this is mortgage fraud, which is a crime.
The reason why it is important to provide accurate information on your mortgage application is because owner occupied and rental property loan terms and qualification requirements are different.
The rate on a mortgage on your primary residence is lower than the rate on an investment property. Additionally, you can usually qualify for an owner occupied refinance with less homeowners equity or a lower down payment.
The table below shows mortgage refinance rates and fees for leading lenders in your area. We recommend that you shop multiple lenders to find the best refinance terms.
In comparison, qualifying for a rental property mortgage can be more challenging than a refinance on your primary residence. First, you are usually required to have more homeowners equity. For example, the maximum loan-to-value (LTV) ratio for a rental property refinance is usually 75% compared to 97% when you refinance your primary residence. This means you are required to have 25% homeowners equity for a refinance on a rental property.
Additionally, when you apply for a rental property mortgage lenders include the housing expense (mortgage or rent) for your primary residence in your debt-to-income ratio, in addition to the housing expense for the investment property. Instead of earning enough money to qualify for one mortgage, you are required to afford two mortgages, which is more difficult to do.
Review How to Get a Mortgage on an Investment Property
There are additional guidelines to meet and documentation to provide if you want to include the rental income from the property in your mortgage application. Most lenders and loan programs require a one-to-two year history of rental income as verified by your tax returns or a rental appraisal to include that income in your refinance application.
Finally, rental property mortgage rates are usually higher than owner occupied rates, which means your monthly payment is higher. The table below outlines rental property loan terms. You can compare the APRs and closing fees to the owner occupied rates above. We advise you to contact multiple lenders to find the lowest rate and costs.
Please note that if you get a mortgage on your primary residence and you decide to rent out the property after the required occupancy period, you are usually not required to notify your lender. If you decide to switch from a standard homeowners insurance policy to a rental property policy, which we recommend, then your lender may become aware that you have moved out and rented the property.
In closing, as long as you provide accurate information on your loan application and abide by the terms of your loan documents, you should be good to go.
"Standard Eligibility Requirements." Eligibility Matrix. Fannie Mae, October 2 2019. Web.« Return to Q&A Home About the author