When you apply for a mortgage, there are many factors that lenders look at to determine your loan terms. Lenders review your credit score, debt-to-income ratio, loan-to-value (LTV) ratio, employment history and type, loan amount, property type, financial profile and other considerations to determine your mortgage rate wand closing costs.
Another factor that impacts your mortgage terms is the occupancy status of the property being financed. If you intend to live in the property, your mortgage is classified as owner-occupied. If your plan is to rent out the property to earn investment income, your mortgage is classified as non-owner occupied.
Lenders apply different loan terms and borrower qualification guidelines for non-owner occupied mortgages. They do this because rental properties may have a higher risk of default than a property you live in as your primary residence. Investment property occupancy and rental income can fluctuate plus the property may require unexpected repairs or maintenance.
Review How a Non-Owner Occupied Mortgage Works
To account for this higher risk profile, lenders charge a higher interest rate for non-owner occupied mortgages and you are usually required to make a higher down payment. The lender may also require that you have a multi-year track record as a landlord which makes it even more challenging to qualify for the mortgage. Additionally, investment properties are not eligible for many low down payment programs.
The table below shows mortgage rates and fees for non-owner occupied loans. We recommend that you shop multiple lenders to find the best mortgage terms.
Because of the differences in loan terms and qualification requirements, it is preferable to obtain an owner occupied mortgage as opposed to a non-owner occupied loan. The mortgage rate is lower plus it is easier to get approved.
Lenders are aware of this and apply certain guidelines to make sure that your mortgage is classified and priced properly based on property occupancy. On your loan application you are required to indicate if you intend to occupy the property. If you provide false information on a loan application it is mortgage fraud, which is a serious offense. This is the first step that lenders take to ensure that your property occupancy information is valid.
Most lenders and programs also require you to occupy your property within 60 days of your loan closing for owner occupied mortgages. Additionally, the homeowners insurance policy you obtain should cover a primary residence. Taking out a rental property insurance policy can be a red flag to the lender that you do not intend to occupy the property.
But what happens if you try to get an owner occupied mortgage on a different property after your mortgage closes? The answer depends on how long you wait after your loan closes and where the property is located.
If you obtain an owner occupied mortgage, you are typically not eligible for a new owner occupied loan on a different property for a year. When you apply for the new mortgage, the details of the loan on your existing property are discovered by the lender. As long as you have not sold your current property and that mortgage remains outstanding, you are not eligible for a second owner-occupied mortgage within the one year waiting period, even if you intend to move out of your current property and live in the new home.
In this scenario you may be able to qualify for a non-owner occupied loan on the property you want to buy but the mortgage terms are more expensive and the qualification guidelines are stricter, as we summarized above. Depending on your income, down payment and other factors, you may not be able to meet the investment property mortgage requirements, which is an important to understand if you want to buy a new home but keep your current one.
The only way to obtain a second owner occupied mortgage within the specified waiting period is if the new mortgage is for a property in a different county. In this scenario, the mortgage may be classified as a loan on a second (or vacation) home but your mortgage terms should be better than the terms for an investment property. If you are moving to a different county for a new job, you may be able to qualify for an owner occupied mortgage on a primary residence.
Lenders apply these guidelines because they do not want you to buy a property that you indicated would be your primary residence even though you always intended to move out of the home and use it as a rental property soon after your mortgage or refinance closed.
However, if you are willing to wait twelve months after your mortgage closes or if you purchase a property in a different county, you should be able to qualify for a new owner-occupied loan and benefit from the better mortgage terms.
Because mortgage terms and underwriting guidelines vary by lender, we recommend that you review the occupancy requirement for your mortgage before you apply for your loan.
Fannie Mae Owner Occupancy Mortgage Guidelines: