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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Non Owner Occupied Mortgage
When you are applying for a mortgage the lender will generally check your income, credit, and other important factors before approving you for the mortgage.
However, the lender or the bank needs to know whether you are going to live in the property or rent it out.
The occupancy of the owner plays an important role to derive the interest rate that is going to be charged on the mortgage for the lender. In this post, we will understand what a non-owner occupied mortgage is in detail.
What Is A Non Owner Occupied Mortgage?
A non owner occupied loan is a mortgage in which the owner of the home does not reside in the property. The lenders would require this information to determine the interest rate that they will be charging on the mortgage.
All other things being equal, this type of loan has a higher interest rate and a higher down payment compared to an owner-occupied mortgage.
The reason for high interest and higher down payments is that borrowers for non-owner-occupied loans are more likely to default.
An important reason for the high probability of default is that the property is not owner-occupied for residing. Most non-owner-occupied real estate is held for investment and rental income purposes.
Generally, the mortgaged property is held as collateral by the lender to ensure the repayment of the loan.
Banks do this to prevent default on the loan. If the property owner defaults on the mortgage loan, the bank can foreclose on the property and recover the debt `owed.
If the borrower defaults on the owner-occupied property, he or she could lose the property and have to seek alternate living options.
Therefore, an owner-occupied home has a lower risk of default compared to a non-owner-occupied home.
As non-owner-occupied properties are typically held for investment purposes, borrowers are more likely to default on the mortgage.
Risk increases when the market value of an asset falls significantly. The housing market crash of 2008 is a great example.
What Are The Requirements to Qualify For An Owner Occupied Mortgage Work?
The qualifying requirements for this type of mortgage are more or less similar to an owner-occupied mortgage.
Down payment
When applying for a non-owner occupied home loan, the down payments are usually higher than owner occupied loans due to the potential high risk of default.
Depending on the lender you might have to come up with a down payment of anywhere between 20 to 30 percent of the sales price.
In the state of Texas, the minimum down payment required for this type of loan is 25%.
Property Type
This mortgage is only available for condominiums and single-family homes for up to 4 units where the owner is not planning to reside in any of the available units and all of them should be rented out.
Credit
The credit score required for qualifying for a non-owner-occupied loan is similar to an owner occupied mortgage.
Usually, the minimum credit score required for any mortgage is 620. However, it depends on lenders and some might be able to qualify the borrower below 620 credit score as well.
Debt To Income
This parameter is also similar to the one used to qualify for an owner-occupied mortgage.
To calculate the debt to income, the lender could also use the rental income coming from the non owner occupied property that is being mortgaged.
What Is Occupancy Fraud?
As the interest rates are higher on non owner occupied loans, some unethical borrowers try to show that it is an owner-occupied property to get the benefits of low-interest rates and save money.
This unethical practice by the borrower is known as occupancy fraud. It occurs when a borrower lies on a mortgage application about whether or not they are going to occupy the property as their primary residence.
If disclosed, the borrower could face many consequences, including being charged with bank fraud or forcing the borrower to repay the entire mortgage balance immediately.
Conclusion
If you are looking to buy a rental property, you would usually end up getting a non-owner-occupied mortgage where the interest rate and the down payments are higher.
If you are looking to save money on interest and looking to lower the down payment, you can stay in one of the units if it is a possible option.
If you have enough equity, you can get a cash-out to refinance on your primary property to purchase the rental property so that you can save money on interest and down payments.
However, make sure you calculate all the possible options before you make any decision.
