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Points: Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
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P & I
Principal & Interest: A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to the reduction of the principal balance.
Mortgage Insurance
Mortgage Insurance: The monthly cost for a policy that protects the lender in case you're unable to repay the full amount of the loan. It is typically required for loans that have a loan-to-value ratio between 80% to 100%.
Property Tax
Property Tax: (Also called "Real Estate Tax.") Property taxes are government assessments on real estate property. With mortgage financing, the local, county or state tax assessment on real estate property is considered part of the monthly housing obligation and typically collected and set aside by the lender ...
Homeowner Insurance
Homeowner Insurance: or also commonly called hazard insurance, is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one's home, its contents, loss of its use, or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.lender ...
Homeowner Association Fee
Homeowner Association fee: (HOA) fees are funds that are collected from homeowners in a condominium complex to obtain the income needed to pay (typically) for master insurance, exterior and interior (as appropriate) maintenance, landscaping, water, sewer, and garbage costs.
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Points Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
Origination Fee
Origination Charge: A loan origination charge is a fee charged by the lender for evaluating, processing, and closing the loan.
Credit Report Fee
Credit Report Fee: Fee charged to obtain an applicant's credit history prepared by one or all of the three major credit bureaus. Used by lender to determine the borrower's creditworthiness.
Tax Service Fee
Tax Service Fee: A fee charged by the lender to cover the cost of retaining a tax service agency. These agencies monitor the property tax payments on the property and report the results to the lender.
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Processing Fee: A processing fee is a charge by the lender for clerical items associated with the loan. Examples of processing include loan set up, organization of loan conditions for underwriting, and preparing required disclosures for the borrower.
Underwriting Fee
Underwriting Fee: A fee charged by the lender to verify information on the loan application, authenticate the property's value, and perform a risk analysis on the overall loan package.
Wire Transfer Fee
Wire Transfer Fee: In most cases lenders wire funds to escrow companies to fund a loan. Commercial banks that perform this function will charge the lender so the fee is generally passed on to the borrower.
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FHA Upfront Premium
FHA Upfront Premium: A fee paid in cash at the close of escrow or more commonly it is financed into the loan. These premiums are pooled together by the FHA and are used to insure the risk of borrower default on FHA loans. FHA upfront premiums are prorated over a five year period, meaning should the homeowner refinance or sell during the first five years of the loan, they are entitled to a partial refund of the FHA upfront premium paid at loan inception.
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Other fees could be either additional Administrative Fees that a lender charges or it could be a Flat Fee to cover all lender charges such as: (Origination Fees, Points, Underwriting and Processing Fees, Credit Reports and Tax Service Fees)

The flat fee does not include prepaid items and third party costs such as appraisal fees, recording fees, prepaid interest, property & transfer taxes, homeowners insurance, borrower's attorney’s fees, private mortgage insurance premiums (if applicable), survey costs, title insurance and related services.

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Non-Owner Occupied Mortgage Overview

Non-Owner Occupied Mortgage Overview

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience
  • Defining 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.

    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. If you intend to rent out the property then the mortgage is classified as 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.

  • Differences Between Owner Occupied and Non-Owner Occupied Mortgages
  • Investment property mortgage rates are usually 0.25% - 0.50% higher than the interest rates for a home you live in because of the higher risk and complexity associated with non-owner occupied loans.  Closing costs, such as lender, title, settlement agent and appraisal report fees for investment property 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.

    The table below shows investment property interest rates and fees for leading lenders in your area.  We recommend that you shop multiple lenders to find the best loan terms for an investment property mortgage.

  • %
    Current Non-Owner Occupied Mortgage Rates as of February 16, 2019
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    Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.
  • 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.  Interest expense, property tax and other expense items, however, do offset any rental income which reduces the taxes owed on an income property.  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.

  • Qualifying for a Non-Owner Occupied Mortgage
  • If you are buying a rental property, lenders review the projected cash flow profit or loss from the property to assess your ability to qualify for the loan.  To determine the rental income for the property, lenders usually use 75% of projected income according to the rental appraisal report or 75% of rental income according to signed lease agreements.  Lenders use 75% of rental income instead of 100% to account for vacancies as well as property maintenance costs and one-time expenses.

    If you are buying a rental property for the first time and lack two years of landlord or property management experience, the lender usually uses the rental appraisal approach or discounts the rental income altogether. In this second scenario, you are required to qualify for the mortgage based solely on your personal finances which is usually more challenging.

    If you are refinancing a non-owner occupied property, lenders typically require documentation such as the Schedule E from your tax returns for the prior two years to verify the rental income. For a refinance, lenders also review any executed rental agreements to understand projected rental income in the future, although lenders usually use the low rent figure. In short, for both purchases and refinances, lenders tend to be as conservative as possible when they calculate rental income for non-owner occupied mortgages.

    Use our free personalized mortgage quote form to compare no obligation proposals from leading lenders.  Our quote form is easy-to-use, requires minimal personal information and does not impact your credit.  Comparing loan quotes is the best way to save money on your investment property mortgage.

  • Lenders use the rental income figure to determine the projected cash flow or loss for the property.  Property cash flow is usually defined as rental income minus total monthly housing expense including your mortgage payment, property tax and insurance as well as expected maintenance costs.  If the property is projected to generate positive cash flow, then that income can help you qualify for the mortgage. 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. As a general rule, a buyer must typically make a down payment of at least 33% for a rental property to be break-even or profitable on a cash flow basis.  This does not mean you need to put down 33% of the purchase price to qualify for the mortgage, but you need to show that you make enough money personally to absorb any potential monthly cash flow loss that may be associated with making a lower down payment and having a higher loan amount and monthly payment.

    Use the FREEandCLEAR Lender Directory to find top-rated lenders that offer investment property loans.


  • Great Mortgage IdeaRelated FREEandCLEAR Resources

  • Sources

    Rental Property LTV Ratio: https://www.fanniemae.com/content/eligibility_information/eligibility-matrix.pdf

    Rental Property Mortgage Qualification: http://www.freddiemac.com/learn/pdfs/uw/rental.pdf

About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry


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