You hear the term owner-occupied all of the time in the mortgage industry. Just what does it mean? How do lenders determine if your home qualifies? What is the difference in terms of loan approval? We cover this and more in the article below.
The Definition of Owner-Occupied
First, let’s look at the definition of owner-occupied. It means the home you will live in full-time. It doesn’t have to be just a single home, though. You can have a property with four units and still get owner-occupied benefits. The key is that you live in one of the units. It doesn’t matter if you rent the other three units out. But, you must call one of them “home.”
What’s the Difference?
You might wonder why lenders would care if you live in the property or not. There is a big difference, though.
If you don’t live at the property, you are less likely to take care of it. This means maintenance and repairs. It also means you are less likely to make the mortgage payment your priority if you suffer financial issues. People trying to save the home they live in will do just about anything. But, those with a mortgage on a home they only sometimes occupy probably won’t go to great lengths to save it.
What Loans Require Owner Occupancy?
Certain loan programs won’t even give you a loan if you don’t personally occupy the property. This is the case for most government-backed loans. For instance, the FHA loan is only for primary residences. If you plan to buy the home and rent it out, you won’t be able to secure FHA financing. The same is true for VA and USDA loans.
If you do not plan to live at your home full-time, you may have to opt for conventional financing. Be prepared for slightly stricter requirements than you would experience if you were to live in the home, though. Also, you will likely need more money for this type of loan. We discuss the requirements below.
Stricter Requirements for Non-Owner-Occupied Properties
When you live in the property, you have more interest in it. This is the case even if you only put down a small down payment. Conventional loans, for example, usually require at least a 5% down payment. That’s not a lot, though. On a $200,000 loan, that equals just $10,000. Borrowers experiencing financial difficulty might not go to great lengths to save their loan with only $10,000 invested.
Because of this, conventional loans usually require much higher down payments for non-owner occupied properties. The amount varies by lender. But, it’s not unusual to see requirements of 30% or more for a down payment.
Lenders also require lower debt ratios and higher credit scores when you don’t occupy the property. Again, this goes back to the level of risk the loan causes. A lower credit score might mean you aren’t financially responsible. A lender might think twice before giving you a loan for a property you won’t occupy.
The same is true for debt ratios. The higher your debt ratio, the less likely you are to secure approval on a non-owner occupied property. A high debt ratio means you are over-extended. Making sure you get your bills paid could be a struggle. Not too many lenders will want to take a part in that.
The Financial Benefits of Owner Occupied Properties
Because of the lower risk owner occupied properties pose, you usually benefit with a lower interest rate. If you were to buy the property as a second home or investment property, you’d probably pay 0.5 to 1% more.
You might also benefit with lower closing costs. Because there is less work for the lender to do, they don’t have to charge as much. Buying a second home or investment property requires more work out of the lender.
When you complete your mortgage application, you will have to state that you intend to occupy the property. Of course, no one can predict the future. If you find that you can’t occupy the property for whatever reason, talk to your loan servicer. It’s better to be upfront and honest than to find out the hard way that there are penalties. In most cases, the issues can be worked around, but you have to talk to your lender to find out for sure.