Every so often, someone will be interested in financing for a home they will not be living in 100% of the time...they want the best rate which is "owner occupied". It's crucial to know the difference in your lenders eyes and to be completely upfront so you avoid committing fraud. Bottom line, the property and situation needs to make sense to the underwriter. Here are some basic definitions:
Principal/Primary Residence. When a property is classified as "owner occupied" it receives a better interest rate than an investment property. It's very straight forward:
- The owner lives in the property for a majority of the year.
- The property is in a location that make sense in relation to their employment and contains characteristics that suits the needs of their immediate family.
- The borrower acknowledges (on several loan documents) they intend to occupy the property. Note: "intend" does not mean, "oops...I financed this believing I would live here and now I've decided to buy another property near by that I'll occupy". Typically the lender wants the buyer to occupy the property within 30 days of closing.
Second Home. A second or vacation home must be a reasonable distance away from a principal residence. Typically lenders like to see a minimum of 50 miles for distance from the borrowers home. The owner must occupy the property for some portion of the year and the property must be suitable for year round occupancy. Second home definitions can vary from lender to lender. Some will insist that a second home be in a resort area. It's generally a little tougher to qualify for a second home--borrowers are often qualifying with mortgage payments on two properties: their primary and the proposed second mortgage.
Investment Property. This is a property that the borrower does not occupy. It can also be a "second home" or vacation home that is too close to a primary residence or that the underwriter does feel strong enough that it is indeed a vacation home. As there is a higher risk to banks with investment properties, the interest rate reflects the risk (the higher the loan-to-value, the higher the rate).
Recently, I was working with a woman who currently owns a one bedroom/one bathroom condo. A larger two bedroom unit became available and she decided she wanted to purchase that and to rent out her one bedroom. Where this could be potentially classified as an "investment property" since the units are obviously closer than 50 miles to each other, it makes sense to the underwriter that she is moving to a larger unit. As long as the buyer moves into the two bedroom within 30 days of closing, she qualifies for owner occupied on her two bedroom. If she were to refinance her one bedroom, it would be considered "non-owner occupied".
Another common scenario is if a parent is helping their adult child (or other family member) buy a home. If that home is located too closely to the parents home and they are buying it without their child being a co-signer, it may also be treated as an investment property. However if the property is for housing the child while in college or if the child is disabled, the borrower may qualify for an "owner occupied mortgage" rate with the Family Opportunity Mortgage. The Family Opportunity Mortgage does make exceptions with occupancy for family members who are buying homes for:
- Elderly Parents
- College-bound Child
- Disabled Adult Child
Lenders will do post closing investigations to make sure that borrowers are actually residing in the property. If they find that the borrower is not, they may call the Note (mortgage) due...and that may be just the beginning of that person's troubles. Mortgage fraud is a very serious issue and falsely stating that one intends to occupy a property tops the list. Knowingly providing false information on a loan application is a federal crime.
From Fannie Mae and Freddie Mac's Uniform Deed of Trust:
Borrower shall occupy, establish, and use the Property as Borrower’s principal residence within 60 days after the execution of this Security Instrument and shall continue to occupy the Property as Borrower’s principal residence for at least one year after the date of occupancy, unless Lender otherwise agrees in writing, which consent shall not be unreasonably withheld, or unless extenuating circumstances exist which are beyond Borrower’s control....
Borrower shall be in default if, during the Loan application process, Borrower or any persons or entities acting at the direction of Borrower or with Borrower’s knowledge or consent gave materially false, misleading, or inaccurate information or statements to Lender (or failed to provide Lender with material information) in connection with the Loan. Material representations include, but are not limited to, representations concerning Borrower’s occupancy of the Property as Borrower’s principal residence.
In defense of most borrowers, sometimes it may seem unclear as to what type of occupancy a property qualifies for. Borrowers simply need to be upfront with their Loan Originator with the use and intentions of the property to make sure they do not commit mortgage fraud, even if it is not intentional.
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