Understanding Non-Owner Occupied Loans

What Is a Non-Owner Occupied Loan?

Non-owner occupied loans are a class of loans used in mortgage origination, risk-based pricing, and housing statistics. They are usually for one to four-unit investment properties. 

Basically, a non-owner occupied property is exactly what it sounds like:

The owner is not the occupier of the property

Non-owner Occupied Loans aren’t usually used for multi-family rental properties, such as apartment blocks or complexes, and any commercial properties.

Why do we need the Term Non-Owner Occupied Loans?

Real estate lenders need to accurately classify property to determine the interest rates they will charge to borrowers and ensure that they are compensated for the risk they take when lending money to purchase it. A mortgage on a property that is not owned by the owner might have a higher interest rate than one on an owner-occupied home. Because non-owner occupied property borrowers are more likely to default on mortgages.

Some borrowers will attempt to make a non-owner-occupied mortgage an owner-occupied mortgage to get a lower interest rate and save some money. This type of mortgage fraud is known as an occupancy scam.

Occupancy fraud is when a borrower lies to a mortgage application about whether the property will be owner-occupied. The lender could demand that the entire mortgage amount be repaid immediately or the borrower may face criminal prosecution.

The Real Estate Market and Non-Owner Occupied Properties

Non-owner occupied properties can be condos or other single-family homes, which are rented out. Non-owner occupied properties must have insurance before tenants can use them. A different type of property insurance is required if the property isn't rented to tenants and is intentionally empty without occupants.

A significant portion of the real estate market is made up of properties that can be rented out to other residents. These property investors are looking for properties that require repairs but have the potential to attract tenants if they're refurbished and repositioned. This also applies to other vacation homes, which are not the primary residence of the owner.

Non-Owner Occupied Financing

A class is available for financing non-owner occupied properties for renovation purposes. Non-owner occupied renovation loans are a type of mortgage that the borrower may use to acquire the property and also borrow funds to renovate the dwelling. The property is not a ready-to-rent property that an investor can buy and rent immediately. This mortgage will typically be valued based on the property's value after renovations and repairs.

There is no minimum amount of work that must be done to qualify for this type of mortgage. However, renovations must be permanent. This could be the addition of a bathroom, a roof replacement, new plumbing, or paving a new driveway. Renovating the property must increase its overall value. It is not enough to make cosmetic improvements to increase the property's appeal. Refurbishment and repairs must make a tangible difference to the dwelling's value. These mortgages are typically available to owners who have up to four non-owner occupied properties.

Why rates are usually higher for non-owner occupied 

Non-owner occupied loans will typically cost you more because the associated risk to the lender is higher. The easiest way to understand why is to imagine if you were financing a property you lived in and another you were renting out. If someone is going to default it’s probably going to be the non-owner occupied property.

At USA Private Money. we practice asset-based lending - the asset matters a lot more than the borrower’s credit and other considerations.

Enquire now if you are looking for a non-owner occupied loan or are looking to invest with us.