Financing Owner-Occupant Homes Versus Non-Owner Properties
This guide covers owner-occupant homes versus non-owner properties. Financing owner-occupied homes offers the best interest rate, the lowest down payment requirement, a higher debt-to-income ratio, and the best mortgage terms out of all mortgage loan programs.
Mortgage lenders view owner-occupied home financing loans as less risky than second-home and investment home mortgages.
The reason is that the owner-occupant home borrower is less likely to default on their primary residence. Chances are that homeowners will likely default on their second homes or investment properties in the event of financial distress. There are strict mortgage guidelines on how a home is classified as owner-occupied homes versus investment property. In the following paragraphs, we will cover financing owner-occupant homes versus non-owner properties.
Financing Government-Backed Mortgage Loans
FHA loans are one of the most popular mortgage loan programs. It offers home buyers with less-than-perfect credit and high debt-to-income ratios the opportunity to become homeowners with only a 3.5% down payment and a 580 credit score. However, FHA loans are only available to owner-occupied homeowners.
FHA loans are not available for second-home buyers and investment property buyers. All government loans are for owner-occupant home financing only.
VA, FHA, and USDA do not permit non-owner-occupant financing. Financing for owner-occupant and non-owner homes (such as investment or rental properties) can differ due to varying risk profiles and purposes.
Down Payment Guidelines Financing Owner-Occupant Homes Versus Non-Owner Properties
Some key differences in financing these two types of properties are the down payment requirements and the mortgage rates. Lenders typically consider your credit score, income, debt-to-income ratio, and employment history when evaluating your eligibility for a home loan. In addition to the same factors considered for owner-occupant loans, lenders may also assess your experience as a real estate investor and the potential rental income from the property.
Down Payment Guidelines Financing Owner-Occupant Homes
Owner-Occupant: When buying a home you intend to live in, you can often secure financing with a lower down payment. Government-backed loans like FHA (Federal Housing Administration) or conventional loans may require down payments as low as 3% to 5% of the purchase price. Non-Owner Homes: Financing for investment properties typically requires a higher down payment. Lenders may require 20% to 25% down, or even more, depending on the type of property and your creditworthiness.
Interest Rates Financing Owner-Occupant Homes
Owner-Occupant: Interest rates for owner-occupied properties are generally lower than those for non-owner homes. Lenders see owner-occupied properties as less risky and offer more favorable terms. Non-Owner Homes: Interest rates for investment properties tend to be higher because lenders perceive them as riskier due to the potential for vacancies, property management issues, and rental income fluctuations.
Financing Owner-Occupant Homes Loan Programs:
Owner-Occupant: You can access a wide range of loan programs for owner-occupied properties, including fixed-rate mortgages, adjustable-rate mortgages (ARMs), and various government-backed options like VA loans for veterans or USDA loans for rural properties. Non-Owner Homes: Financing for investment properties is often limited to specific loan programs, and the terms can be less favorable. For example, you may need to consider options like a conventional or portfolio loan.
Tax Implications Financing Owner-Occupant Homes Versus Non-Owner
Owner-Occupant: You may be eligible for certain tax benefits, such as mortgage interest deductions and capital gains exclusions when you sell your primary residence. Non-Owner Homes: Tax implications for investment properties can be different. You may be able to deduct expenses related to the property, but you’ll also need to account for rental income and potential capital gains taxes when you sell.
Mortgage Insurance Financing Owner-Occupant Homes Versus Non-Owner Properties
Owner-Occupant: If your down payment is less than 20%, you may be required to pay private mortgage insurance (PMI) or mortgage insurance premiums (MIP) for government-backed loans.
Non-Owner Homes: Mortgage insurance requirements can also apply to investment properties, depending on the loan type and down payment.
It’s important to note that the specific terms and requirements for financing owner-occupant vs. non-owner homes can vary among lenders and depend on factors like your creditworthiness and the local real estate market conditions. It’s advisable to consult with a mortgage professional or financial advisor to explore your options and make informed decisions based on your unique situation and goals.
Financing Primary Owner-Occupant Homes
An owner-occupied home is classified when the buyer intends to live in the home they are purchasing. Homeowners must occupy the home at least six or more months out of the year. Owners cannot rent owner-occupied homes for at least one year from closing. There are different types of occupancy on residential mortgages:
- Owner-occupied mortgage
- Second-home mortgages
- Investment Home Loans
Homebuyers applying for FHA loans need to intend on living in a new home. Homebuyers cannot lie on a mortgage application and apply for an owner-occupied home mortgage loan and then turn around and rent it out without having the intent of living in a new home purchase.
Case Scenario Financing Owner-Occupant Homes Versus Non-Owner Properties.
Let’s take a case scenario: Borrowers applying for an FHA loan. The borrower intends to live in a new home. Then change their minds and intend on not living there due to a job transfer, a separation, or other extenuating circumstances. In this scenario, it is fine. Mortgage lenders require that homebuyers live in an owner-occupied home for at least one year. After the one-year seasoning, they can rent it out and purchase another owner-occupant residence.
Financing New Owner-Occupant HomesWithout Selling Exiting Home
In this particular scenario, a home buyer will not qualify for the second home as an owner-occupied home. This is because it is close and similar in size to the first owner-occupied home.
Case Scenario on Financing Owner-Occupant Homes
On the flip side, let’s take a scenario where the homeowner lives in a 2,000-square-foot home. Kids are grown and off to college and out of home. The homeowner intends to downsize and move to a 1,000-square-foot home. Homebuyers will qualify for owner-occupant home financing on the second home due to downsizing.
The borrower would need to qualify for both housing payments in the debt-to-income ratios qualification.
