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Investment Property or Owner Occupied? How a lender determines occupancy

By Edited Jul 18, 2015 0 0

rental property

income producing property

So your son or daughter is getting ready to leave home and you’re going to be an empty-nester.  They’ve lived with you for the past 18 years and now they are going off to college.  You start looking at apartments for them to rent in the area and the rent seems pretty high.  “Hmmm, why don’t I buy my little Johnny or Kate a home or condo so that they can live there instead of paying someone else rent?”  As low as interest rates are right now the mortgage payment won’t be much more than paying someone rent.  “Since Johnny is my son and will be living in the property I should be able to structure the loan as an owner occupied property.  We will be able to get an excellent interest rate with a minimal down payment, right?”  Wrong.  A common misconception many borrowers have is that the only time a home will be structured as an investment property is if it is intended to be a "rental property" or an “income producing” property.  “If I’m not intending to rent the property to a tenant, why does the loan have to be structured as an investment property?”

Any home that a parent purchases for a son, daughter, grandmother, grandfather to live in will be initially classified as an investment property by Underwriting and needs to be priced and structured accordingly.  A top producing Loan Officer explains this to his or her customer during the pre-qualification stage so that the customer understands this prior to lock.  The unscrupulous/shady Loan Officer will give the borrower the impression that the loan will be structured as owner occupied on the front end (prior to lock) to make the rate seem a lot lower than his competitors/other lenders.  Then, once the loan goes to Underwriting (borrower is under contract, earnest money is on deposit with the seller, etc.), the Underwriter will counter the loan to an Investment Property and it is too late for the borrower to do anything.  The shady Loan Officer will play dumb saying, “Oh, I can’t believe Underwriting is making us do this as an investment property”.  The borrower at this point is left with few options.  It is a little late in the game for them to shop rates and compare lenders.  The borrower’s back is against the wall with the closing date rapidly approaching.  The customer is basically forced into taking the higher rate/higher down payment amount associated with the investment property or walking away from the deal and losing the earnest money deposit.  This is NOT how a good Loan Officer does business. 

Be completely up front with your customer during the pre-qualification stage.  Explain the rules/guidelines so that your customer understands them.  While you might lose out on a deal or two to one of these shady Loan Officers, you will come out way ahead in the long run.

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