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Owner Occupancy Requirements In A Post-COVID World; Second Home Rates Higher Now

A white coastal second home with red and black accents is owner-occupied by the residents in order to receive more favorable funding.

“Owner-Occupied” is a big deal in the mortgage world for several reasons:

  1. Interest rates are more than a 1/2 percent lower than they are for investment properties b/c there is less risk lending to an owner-occupant who will take better care of the property and be much less likely to let it go into foreclosure.
  2. Many loan programs like FHA financing are only available for owner-occupied borrowers; and
  3. Down payment requirements are much lower for owner-occupied properties.

PROOF OF OCCUPANCY

Lenders of course want evidence that a property will in fact be owner-occupied. Here are a few things they analyze:

  1. Other homes. If borrowers own other, nicer or larger homes, lenders will be very suspicious if a buyer claims he wants to move into a smaller or inferior home. Lenders of course allow this but they will require a strong letter of explanation.
  2. Proximity to employment. This is the other major factor lenders analyze but they are much more flexible now in a post-COVID world b/c so many employees can now work remotely. In the old days, borrowers had to be within a “reasonable commute distance” of their employer (and they still do if their work is hands-on of some sort, e.g. factory work). But nowadays, all employees have to do is get a letter or a verification from their employer that states they are allowed to work remotely and they can pretty much buy in any location they want as long as they have internet access. We in fact see this all the time now.

MAIN TAKEAWAY: Borrowers can buy “owner-occupied” almost anywhere in the U.S. now as long as they can get a letter from their employer that says 100% remote work is kosher. Self-employed borrowers will need to prove that their business will not be adversely impacted by a move to a remote location.

OCCUPANCY CHECKS

Borrowers sometimes try to mislead lenders when it comes to owner occupancy b/c they want the superior financing that comes with it. Lenders, however, are good at guessing when this is the case and will sometimes require additional evidence of owner-occupancy during the underwriting process. This sometimes includes signed affidavits as well as proof that utilities are or will be in the borrower’s name.

Lenders also sometimes do occupancy checks after loans close by literally having someone knock on the door of the property to ask who lives there. This is why borrowers should be very careful b/c lying about owner-occupancy can result in a loan getting called due and/or very serious loan-fraud charges.

MOVING IN FOR TWELVE MONTHS

Owner-occupant borrowers have to attest that they will live in the property for a minimum of twelve months when they sign loan documents.

We do, however, see borrowers move before their twelve-month-requirement runs out but I personally have never seen this become an issue as long as the borrowers have an explanation, e.g. “I needed to move for employment reasons.”

SECOND HOME MARKETS ARE VERY HOT

We are seeing many second home markets heat up more than ever b/c so many buyers can now simply buy those homes as owner-occupants b/c of the new flexibility with respect to remote work.

Two of our Senior Managers, for example, now work much of the time from their second homes in the Lake Tahoe region.

Opting for owner-occupied financing as opposed to second home financing is often a better option b/c the down payment requirements are slightly less and the rates will be slightly less now too.

This is b/c Fannie and Freddie recently announced that they will no longer be willing to finance as many second home properties now, and this restriction will push up rates.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167