Understanding the definition and underwriting guidelines of an owner-occupied mortgage is essential for a smooth loan transaction. Whether purchasing or refinancing a home mortgage, the characteristics of an owner-occupied mortgage and property vary from "second home" or "investor" types. Prospective borrowers should know and follow the rules to avoid raising underwriting red flags or, worse, being declined for a mortgage.
According to the Federal National Mortgage Association, commonly known as Fannie Mae or the abbreviation FNMA, an owner-occupied mortgage secures a property that is a borrower's principal or primary residence. Simply put, it is the home base where a borrower states he will live for a majority of the year. The owner-occupied status directly applies to the property as well, so the terms "owner-occupied mortgage" and "owner-occupied property" are generally interchangeable.
Across the Industry
Most mortgage lenders issue underwriting approvals in tandem with Fannie Mae's mortgage guidelines, which are published in an annual selling guide well-known and acknowledged among industry insiders. Some lenders also make approvals based on similar rules by Fannie's industry brother "Freddie Mac," or the Federal Home Loan Mortgage Corporation, abbreviated FHLMC.
Exceptions may arise when the owner-occupied status is granted to a borrower who is not living at the property. These are rare and heavily scrutinised by underwriters.
According to the FNMA 2010 Selling Guide, an owner-occupied mortgage can still be classified as such if "a parent wants to provide housing for a physically handicapped or developmentally disabled adult child who is unable to work or does not have sufficient income to qualify for a mortgage on his own." The parent in this case is considered to be the owner and occupant, though he cannot call the property his primary residence. The same applies for a child who wishes to provide housing for a parent under similar circumstances. Mortgage co-signers and guarantors can also be deemed owner occupants, though they are likely not living at the property.
Other Mortgage Occupancy Types
In addition to an owner-occupied mortgage, second home and investment occupancy types exist. Second-home mortgages secure properties that are generally a reasonable distance away from a borrower's primary residence -- typically over 100 miles -- or are located in a known vacation or resort area. The property must not have any tenants or rental agreements, nor can it be under management-company contracts. Investment-property mortgages are for owners who expect to earn income from tenants living in their properties.
A Word to the Wise
Landlords and multiple-property owners know that mortgage rates on investment and second home mortgages are almost always higher than rates on owner-occupied mortgages. Underwriters are keen on borrowers attempting to achieve lower mortgage rates by improperly classifying occupancy type when purchasing or refinancing investment or second homes. For example, a borrower wishing to buy an investment property might attempt to classify the purchase as a second home for a slightly better mortgage rate. Second-home purchasers might try to mislead underwriters by claiming it as their primary home.
Underwriters would then apply Fannie Mae's tests on the property, along with common sense. More than likely they would revise the mortgage offer based on the true occupancy type, which may impact down payment requirements and interest rates. Understand that mortgage fraud is a federal offence with severe penalties.