What Is Non-Owner Occupied?

Non-owner occupied is a classification used in mortgage origination, risk-based pricing, and housing statistics for one- to four-unit investment properties. The classification means the owner does not occupy the property. The term non-owner occupied is not typically used for multi-family rental properties, such as apartment buildings.

Key Takeaways

  • Non-owner occupied is a real estate classification that means the property owner does not occupy the property as their personal residence.
  • The accurate classification of a property as non-owner occupied is important for lenders to determine the interest rate they will charge borrowers and to ensure they are adequately compensated for the risks they take in lending money.
  • Because borrowers of non-owner occupied properties are more likely to default on their mortgages, lenders will charge them a higher interest rate than a mortgage on an owner-occupied property.
  • Occupancy fraud occurs when a borrower lies to a lender, claiming that a property will be owner-occupied when in reality it will not.
  • A borrower can use a non-owner-occupied renovation loan to purchase an investment property and pay for the costs to repair the property for future tenants.

Understanding Non-Owner Occupied

The accurate classification of property is important for real estate lenders to determine the interest rate they will charge a borrower and to ensure they are adequately compensated for the risks they take in lending money for a purchase. A mortgage on a non-owner occupied property might have a slightly higher interest rate than a mortgage on an owner-occupied property. This is because borrowers of non-owner occupied properties are more likely to default on their mortgages.

Because of the higher interest rate, some unscrupulous borrowers will try to classify a non-owner occupied mortgage as an owner-occupied mortgage to receive a lower interest rate and save money. This is a type of mortgage fraud known as occupancy fraud.

Occupancy fraud occurs when a borrower lies on a mortgage application regarding whether or not the property will be owner-occupied. If discovered, the borrower could face many repercussions, including prosecution for bank fraud or a demand from the lender that the entire mortgage balance be repaid immediately.

In some situations, renting an owner-occupied property may not be occupancy fraud, such as when a homeowner must move elsewhere for a job. To avoid unintentionally committing occupancy fraud, borrowers should contact their mortgage lenders before renting owner-occupied properties to tenants.

Non-Owner Occupied Properties and the Real Estate Market

In many cases, non-owner occupied properties refer to condominiums and other single-family homes that are owned and rented out to others. Non-owner occupied properties require insurance coverage before renters can use them. Furthermore, if the property is not rented out to tenants, and is intentionally vacant with no occupants, a different type of property insurance will be necessary.

Buying and renting out properties for other residential occupants represents a significant part of the overall real estate market. Those who invest in these properties typically search for properties that need repairs but offer the possibility of attracting tenants if they are refurbished and repositioned on the market. This could also apply to different types of vacation properties that are not the primary dwelling of the owner.

Non-Owner Occupied Financing

There is a class of financing for non-owner occupied properties specifically for renovation purposes. A non-owner occupied renovation loan is a type of mortgage that the borrower can use to not only acquire the property but also to borrow funds that will go towards the renovation of the dwelling. In this case, the property will not be a turnkey property that the investor can purchase and immediately rent out. The value of such a mortgage is typically based on the value of the property after it has been refurbished and renovated.

While there is no minimum repair work that must be done with the funds from this type of mortgage, the renovations must be a permanent part of the residence. This could include the addition of a new bathroom, the replacement of a roof, new plumbing, or the paving of a new driveway. The renovations must also increase the overall value of the property the mortgage was taken out on. Cosmetic improvements that increase the appeal of the property are not enough. The repairs and refurbishment must create a tangible improvement to the dwelling's market value. Such mortgages can typically be used by owners with up to four financed non-owner occupied properties.