Non-Owner Occupied Mortgage Overview
- Owner Occupied Mortgage Overview
- Differences Between Owner Occupied and Non-Owner Occupied Mortgages
- Related FREEandCLEAR Resources
A mortgage on property in which you do not live is considered a non-owner occupied mortgage. Investment properties such as a property with up to four units that you buy to generate rental income are considered non-owner occupied properties. The table below shows investment property interest rates and fees for lenders in your area. Click on a lender logo or green arrow to contact a lender about a non-owner occupied mortgage. Below the rate table we review the differences between owner occupied and non-owner occupied mortgages.
An owner occupied property is the primary residence in which you live. A property with up to four units is considered owner occupied as long as the owner lives in one of the units. Second homes, such as vacation homes that reside outside of the county in which you live, are also considered owner occupied properties. The occupancy status is determined at the time you apply for a mortgage. For example, if you intend to live in the property after your loan closes, then the mortgage is classified as owner occupied. If you intend to rent out the property then the mortgage is non-owner occupied. It is important that you provide accurate information regarding property occupancy when you submit your loan application.
If your circumstances change after your mortgage closes you are fine as long as your mortgage application was truthful at the time. For example, you may get a job transfer six months after your mortgage closes and decide to rent out the property. Alternatively, some borrowers may decide to move into a non-owner occupied property, such as an investment property. The borrower must live in the property for at least a year for the property to be re-classified from non-owner occupied to owner occupied.
Non-owner occupied mortgage rates are typically 0.25% - 0.50% higher than owner-occupied mortgage rates. Closing costs, such as lender, title, settlement agent and appraisal report fees, for non-owner occupied mortgages are also usually higher. Most lenders require that borrowers contribute a larger down payment when obtaining mortgages for investment properties, especially for larger, jumbo mortgages. Lenders may require the borrower to make a down payment of at least 25% of the purchase price for a non-owner occupied property, for a loan-to-value (LTV) ratio of 75% or less, although some lenders may require a down payment of only 15%, depending on the number of units in the property and the type of mortgage. For a cash-out refinance on a non-owner occupied property lenders typically permit a maximum LTV ratio of 70% - 75%, depending on the number of units in the property. The lower the LTV permitted by the lender, the greater the down payment (in the case of a purchase) or equity contribution (in the case of a refinance) the borrower is required to have. By comparison, you can qualify for an owner occupied mortgage with little or no down payment, depending on the loan program you use.
As a general rule, a buyer must typically make a down payment of at least 33% for a rental investment property to be break-even or profitable on a cash flow basis. If you are buying a rental property, lenders review the projected cash flow profit or loss from the property (usually 75% of projected rental income according to the appraisal report minus total monthly housing expense including your mortgage payment, property tax and insurance). If the property is projected to generate positive cash flow, then that rental income can help you qualify for the mortgage. Additionally, if you are refinancing an investment property that generates a profit and you want to use that rental income to qualify for the mortgage, lenders typically require documentation such as the Schedule E from your tax returns for the prior two years to verify the rental income.
If the investment property is projected to produce a cash flow loss, any losses are included in the monthly debt figure used to calculate your debt-to-income ratio, which can make it more difficult to qualify for a non-owner occupied mortgage. For example, if you have $500 in total personal monthly debt from credit cards, auto and other loans and the rental property you want to buy loses $200 per month in cash flow, the lender will use $700 ($500 in personal debt + $200 in property cash flow losses )as your monthly debt figure to determine what size mortgage you qualify for. The higher your monthly debt, the lower the mortgage amount you qualify for. You must generate sufficient personal income from other sources, after factoring in any monthly loss from the investment property, to qualify for a non-owner occupied mortgage.
Additionally, most lenders require you to have a certain amount of money in reserve when you get a mortgage for an investment property. The reserve requirement depends on the number of properties you have financed with a mortgage. For mortgaged investment properties one through three, you are typically required to have savings in reserve equal to two months of total monthly housing expense for each investment property. For example if your mortgage payment, property tax and hazard insurance for the property is $3,000 per month, you are required to hold $6,000 in reserve at closing. For mortgage investment properties four through nine you are typically required to have savings in reserve equal to six months of monthly housing expense for each investment property. Please note that the reserve requirement applies even if the property generates positive cash flow.
Mortgages on owner occupied and non-owner occupied properties are treated differently for tax purposes. According to the U.S. tax code, mortgage interest expense for owner occupied properties (on mortgage amounts up to $750,000) can be deducted from your gross income, which provides a significant tax benefit. The mortgage tax deduction benefit does not apply to non-owner occupied properties which is an important consideration for borrowers. Be sure to consult a tax professional to understand the tax rules that apply to non-owner occupied mortgages and investment properties.
Finally, most conventional and government-backed low or no down payment mortgage programs such as the FHA, VA and USDA home loan programs as well as the HomeReady program only apply to owner occupied properties. You can use all these programs except the USDA program; however, to purchase properties with up to four units but at least one of the units needs to be owner occupied.