What Is Non-Owner Occupied?

What Is Non-Owner Occupied?

Let me explain what non-owner occupied means in straightforward terms. It's a classification you'll encounter in mortgage origination, risk-based pricing, and housing statistics, specifically for one- to four-unit investment properties. Simply put, it indicates that the owner doesn't live in the property. You won't typically hear this term applied to larger multifamily rentals like apartment buildings.

Key Takeaways

As a blog writer diving into real estate topics, I want to highlight the essentials right away. Non-owner occupied is a real estate category where the property isn't the owner's personal residence. You need to get the classification right because it affects how lenders set interest rates and cover their risks when lending. Since defaults are more common with these properties, expect higher rates than for owner-occupied homes. Watch out for occupancy fraud, where borrowers falsely claim they'll live there to snag a better rate. And if you're investing, you can use non-owner-occupied renovation loans to buy and fix up properties for tenants.

How Non-Owner Occupied Works

Getting the property classification accurate is crucial for lenders like me to discuss – it directly impacts the interest rate you'll pay and ensures they're compensated for the risks. A non-owner-occupied mortgage often comes with a slightly higher rate than one for a home you live in, due to the higher default likelihood.

Some borrowers try to game the system by misclassifying to get that lower rate, but that's occupancy fraud – a serious form of mortgage fraud. This happens when you lie on your application about occupying the property. If caught, you could face prosecution for bank fraud or have to repay the entire loan immediately.

Important Note on Renting

Here's something important: renting out what was supposed to be your owner-occupied property isn't always fraud, like if you have to relocate for work. To stay on the safe side, contact your lender before renting it out to tenants – that way, you avoid any unintentional issues.

Non-Owner-Occupied Properties and the Real Estate Market

In the real estate world, non-owner-occupied properties often mean condos or single-family homes that owners rent out. You must have insurance in place before tenants move in, and if the place is vacant on purpose, you'll need a different policy.

Investing in these by buying, fixing, and renting them out is a big part of the market. Look for properties that need work but can attract renters after renovations – this includes vacation homes that aren't your main residence.

Non-Owner-Occupied Financing

There's specific financing for these properties aimed at renovations. A non-owner-occupied renovation loan lets you buy the property and borrow extra for repairs. It's not for turnkey rentals; the loan value is based on the property's worth after fixes.

No minimum repair amount is required, but the work must be permanent – think new bathrooms, roofs, plumbing, or driveways. It has to boost the market value tangibly, not just cosmetic stuff. You can typically use these if you have up to four financed non-owner-occupied properties.

Why Is the Interest Rate Higher for Non-Owner-Occupied Properties?

It's simple: if you don't plan to live there as your primary home, you're seen as a higher default risk, so lenders charge more to offset that.

Is It Better To Refinance or Take out a Loan on a Second Property?

This depends on your equity in your main home. Rates are usually lower for refinances on primary residences than on non-owner-occupied ones. Shop around for rates to compare directly.

Can I Get a Better Rate if I Turn a Property Into My Primary Residence?

Yes, if you've had a non-occupied property for a while and decide to make it your main home, refinancing could get you a better rate. Factor in closing costs to ensure it's worth it – like retiring and moving into your vacation cabin full-time.

The Bottom Line

To wrap this up, non-owner occupied just describes a property where the owner doesn't live. These come with higher loan rates than owner-occupied ones, tempting some to commit fraud for savings – but don't do it, as it's a terrible idea. If you own one, ensure proper insurance is in place.