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Occupancy Types: Why They Matter to You and Your Lender

When you’re in the process of getting a mortgage, it’s important to understand how certain factors can affect your interest rates. One important factor that most people tend to overlook is occupancy types. Let’s go over some of the basics now.

What are the different occupancy types?

Lenders will take a variety of things into account when determining whether you intend to live in a house and take occupancy type into consideration because people are much less likely to default on the mortgage of a house they are living in. Because of this, interest rates tend to be lower on primary homes (and highest on investment properties). Some types of loans, such as VA loans, are only available on primary homes. If you are in the military or travel extensively, then you will need a co-borrower, such as your spouse, who stays at home full time.

  1. Primary home: This means you are buying a house that you will be living in most of the time. To qualify, you should be living there at least six months out of the year, should use it as your address of record and occupy it within sixty days of closing. Some lenders may also require that it be within reasonable distance of your job. They also expect you to intend to live there for at least a year.
  2. Second home: This is a house you intend to occupy for only part of the time, excluding timeshares (timeshares are a different loan altogether). The house must also be suitable for year-round occupancy (i.e., not an unheated cabin in a remote area) and distant from your primary residence.
  3. Investment property: This is a property you are buying to either rent out, flip, or both.

How do lenders make sure you aren’t committing occupancy fraud?

If you intend to flip your primary residence, be careful, and consider being honest (in any case, you have to stay in the renovated home for two years to save tax money). “Occupancy fraud,” where a borrower pretends an investment property is a primary home, is very common. Lenders check to make sure you’re not committing occupancy fraud in the following ways:

  1. Your Insurance Policy: Choose a home insurance policy that also requires you live in the house.
  2. Property tax rates: In some cases, homestead laws provide a discount on property taxes that is only available to owner-occupiers, not buildings being rented out.
  3. Door knockers: Although less common than it used to be, banks do sometimes hire people to visit or call houses to make sure the borrowers are actually living there.
  4. Motor vehicle databases: They may check to see if you also have a vehicle or vehicles registered to that address.
  5. High-tech algorithms: Banks are, more and more, using proprietary software that pulls from a variety of databases such as utility bills, tax data, etc.

Getting exemptions, however, can be possible. For example, if you lose your job and take a new one on the other side of the country, your bank will probably allow you to leave before the one-year period. Another common exemption is if you are getting renovations done which will make the property unsafe to live in or uninhabitable, but you’ll generally have to let the bank know in writing.

Again, lenders care because they consider occupancy to significantly reduce the risk of having to foreclose. Banks do not want to foreclose on your home, they would much rather have the mortgage payments than the hassle of selling the property, often at a loss. In fact, if they catch you in a lie, they may call in the loan, meaning you suddenly owe the entire amount and are very likely to lose the property. In extreme cases, people who lie about occupancy have ended up in prison. As lenders have been burned by investors, especially flippers, in the past, they will always give more favorable loans to owner-occupiers.

At the end of the day, your best course of action is to be honest about your occupancy type and take actions, such as updating your vehicle registration promptly, that demonstrate in good faith your intent to occupy the house you are buying. If you’re ready to talk to someone about purchasing a new home, no matter the occupancy type, get in touch with one of our loan officers.

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