Owner-occupied status is an important consideration when financing a property. The Federal Housing Administration (FHA), for example, will only insure owner-occupied homes[1]. VA and USDA loan programs are also reserved for owner-occupied properties.

When it comes to conventional loans, owner-occupied properties usually get more favorable terms than loans for investment properties. There are usually lower down payment requirements and lower interest rates when a borrower is financing a primary residence.

Lenders expect two things when they make loans on owner-occupied homes:

• The borrower will move into the home within 60 days of closing.
• The borrower must occupy the home as their primary residence for 12 months.

Buyers sign a HUD-9548D, which is an Owner-Occupant Certification form. The real estate agent also signs the form and files it with the sales contract.

There are steep penalties for borrowers who file false certifications; lenders can call the loan and foreclose if the borrower cannot pay. In addition, mortgage fraud is a criminal offense[2] carrying fines of up to $1 million and up to 30 years in prison if convicted.

Intent Matters

Although lenders can call the loan and refer the borrower for criminal prosecution if the borrower does not fulfill the 12-month occupancy period, they usually consider the borrower’s circumstances before deciding to act.

For example, if a borrower has to relocate because of a job before the year is up and decides to rent the house instead of selling it, there is no intent to commit fraud. If there are documents to support the move, this should not trigger any reprisal from the lender.

Although owner-occupied loans and investment properties seem mutually exclusive, buying an investment property with an FHA or VA loan is possible.

These programs allow borrowers to buy a multi-family property of up to four units, provided the borrower lives in one unit as their primary residence.

As a popular approach for new real estate investors, it also has many advantages:

• Low barrier to entry. Because the down payment requirement and loan terms are more favorable than a loan for an investment property, new investors can get into an income-producing property with far less money out-of-pocket.
• Income stream to offset loan payments. Rent payments can cover monthly mortgage payments. In addition, some loan programs allow borrowers to use rental income to qualify for the mortgage.
• Lower management costs. Many landlords in an owner-occupied property handle most or all of the management responsibilities, which lowers the cost of owning an investment property.

Of course, there are drawbacks to owner-occupied investments as well, not the least of which is sharing one’s home and property with others. Not everyone is cut out to be a landlord, either, as tenant issues can be constant and unpredictable.

Finally, some landlords may find it more difficult to find tenants when the owner lives in the same property and may have to discount the rent price slightly to compensate for the tenant’s perceived loss of privacy.

Investors who want to get into commercial real estate may qualify for favorable loans backed by the Small Business Administration (SBA)[3]. To be eligible, the owner must occupy at least 51% of the available square footage.

Non-SBA loans are also usually more favorable for owner-occupied commercial real estate because the lender perceives these loans as lower risk.

Owner-occupied means that the titleholder considers the property their primary residence. In commercial real estate, owner-occupied means that the titleholder occupies at least 51% of the building’s square footage.

Loans for owner-occupied properties are usually easier to qualify for and offer more favorable terms. However, the owner must occupy the property within 60 days of closing and live in it as the primary residence for at least 12 months before renting it out. There are stiff penalties for falsifying mortgage applications and occupancy certifications.

1. Federal Housing Administration. (2019.) FHA Loans and Owner Occupancy. Retrieved from https://www.fha.com/fha_article?id=371
2. Warden, P. (2018.) Should you lie on your mortgage application? The Mortgage Reports. Retrieved from https://themortgagereports.com/34866/should-you-lie-on-your-mortgage-application
3. Umberger, S. (n.d.) U. S. Small Business Administration Loan Funds Available to Purchase Commercial Real Estate. U.S. Small Business Administration. Retrieved from https://www.sba.gov/content/u-s-small-business-administration-loan-funds-available-purchase-commercial-real-estate