Non-Owner-Occupied Mortgage
What Is A non-owner-occupied Mortgage?
A non-owner-occupied mortgage, also known as an investment property mortgage or rental mortgage, is a form of mortgage meant for residential properties with 1 – 4 units. However, it is specifically designed for borrowers who do not intend to live in the property.
In effect, real estate investors who do not plan to use a property as their primary residence will want to obtain a non-owner-occupied mortgage. A piece of advice for those looking to purchase larger holdings – like an apartment or condo building with numerous units – is that you would not find this form of mortgage to be a good fit.
Also, be aware: Because these loans are meant for properties that are owned purely for investment purposes, there are higher-interest non-owner-occupied mortgage rates as a result. That is because non-owner-occupied properties present a higher risk of default in the eyes of financial lenders.
In addition, lenders may also require borrowers to put down a larger down payment. This will safeguard the lender's investment against the increased risks that non-occupied-owner properties present as well.
What’s The Difference: Residential Vs. Commercial Loans?
An owner who lives in a multifamily home can qualify for a residential mortgage because lenders know they will do whatever it takes to stay in a primary residence in times of economic distress. At the same time, the residential mortgage market is also heavily regulated. This protects both home buyers and the U.S. economy by the American government, while the investment property mortgage market is not.
What to Expect If You are Applying for a Rental Property Mortgage
Looking to apply for a rental property mortgage on an investment property? It is important to keep several things in mind.
Higher Interest Rates
Lenders consider mortgages along a spectrum of risk. Higher risks are associated with the higher interest rates charged on non-owner-occupied mortgage rate programs.
A borrower’s credit score and credit history may also impact interest rates. Generally, the better your credit score, the better the interest rate that you’ll receive. The type of property and number of residences may impact your interest rate as well.
More Stringent Credit Requirements
Lenders require higher credit scores, typically at least a 620 FICO® Score, from non-owner-occupied mortgage applicants. Additionally, lenders will want to see a manageable debt-to-income ratio (DTI) and large cash reserves to cover unforeseen costs or vacancy rates.
Higher Down Payments
Because of the bigger risk than the borrowers, financial lenders will generally require a larger down payment (20% – 30%) from investment property borrowers wishing to apply for a non-owner-occupied mortgage loan.
Shorter Terms
While a home buyer can extend repayment over 30 years, non-owner-occupied mortgage lenders tend to offer much shorter terms.
Adjustable Interest Rates
Most non-owner-occupied mortgage loans are adjustable-rate mortgages (ARMs), which can cost investors much more should interest rates rise significantly.
Are There Alternatives To non-owner-occupied Mortgages?
If you wish to expand the scope of your real estate investments, you can access alternative financing options beyond non-owner-occupied mortgages.
If possible, you should consider simply living in a unit on the property. Such property will be easier and more convenient to maintain. More importantly, you can also pay off the mortgage faster on your personal residence using this strategy.
Note that there are FHA loans available for real estate investors who are considering purchasing owner-occupied multifamily homes with up to 4 units. Moreover, once you have satisfied the 1-year owner-occupancy requirement, FHA borrowers like yourself are free to rent out your unit and move into a new property. Be advised as well: You could also lease your current primary home or make it your second home to satisfy FHA occupancy rules.
If You’re Ready to Take the Next Step in Real Estate Investing
Do you already have a demonstrated business record in real estate investing? Small Business Administration (SBA) loans are available for landlords who are ready to graduate from real estate side hustle to career real estate investors.
It is also worth keeping in mind that the SBA loan application process focuses more on applicants’ business plans. It also considers your track record more than your personal credit score and debt-to-income ratio. However, these factors still play a role in the lender's decision.
Can I Take A Home Equity Loan On My Rental Investment Property?
Unfortunately for those wondering, home equity loans and home equity lines of credit (HELOCs) are specifically available only to owner-occupied properties.
On the bright side, investors can take advantage of low current mortgage rates and high home appraisals. Instead, this allows investors to access equity with a cash-out refinance of their rental properties. Rocket Mortgage® does not offer home equity loans or HELOCs.