Non-owner occupied is a classification used in mortgage origination, risk-based pricing, and housing statistics for one to four-unit investment properties. 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.
Breaking Down Non-Owner Occupied
A mortgage on a non-owner-occupied property might have a slightly higher interest rate than an owner-occupied mortgage, as non-owner-occupied mortgages are more likely to default. Because of the higher interest rate, some unscrupulous borrowers will try to classify a non-owner-occupied mortgage as an owner-occupied mortgage to try and save money.
How Non-Owner Occupied Properties Are Used in 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. 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. 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 dwellings market value. Such mortgages can typically be used by owners with up to four financed non-owner occupied properties.