What Constitutes Occupancy for a Home Loan?

When you apply for a mortgage loan, the lender analyzes more than your credit score and income -- it also considers the purpose of the property you want to buy. You'll have to disclose how you'll use the property on the loan application. The choices are as a primary residence, second home or investment. Owner occupancy has implications regarding the interest rate and terms of your loan agreement. Additionally, some loans, such as FHA or VA mortgages, can be used only to purchase a home you're going to occupy as a primary residence.

TL;DR (Too Long; Didn't Read)

For a home loan, an owner-occupied home is your primary residence. It's where you live for most of the year, which you do not rent to someone else. Second homes and vacation homes may be considered owner-occupied, but they come with a set of guidelines that defines this. Investment homes that you rent to someone else is an example of a non-owner-occupied property.

Primary Residence Definition

The term "primary residence" is loosely defined in regard to real estate. Even though there's no strict definition, several characteristics are agreed on. A home is considered your primary residence if you live there for the majority of the year, typically six or more months. Additionally, while you're not living in the home, you can't rent it out to a tenant.

When purchasing a home you intend to live in, it's considered owner-occupied in the eyes of the lender. However, your lender might require you to provide proof or sign an affidavit stating that you intend to occupy the property.

Vacation Home or Second Home Definition

A vacation home or second home is an additional property that you occupy for smaller portion of the year. The home doesn't necessarily have to be used for vacation purposes, but it should be a fair distance away from your primary residence, typically 50 or more miles. As with the primary residence requirement, you can't rent out the property while you're not staying there.

Investment Property Definition

If a home is used as a rental property, which you earn income from, it's considered an investment property. Any type of property, such as single-family homes, multi-unit properties or condos, can be an investment property.

If you simply act as the owner and landlord of a rental home, it's considered non-owner occupied. However, if you physically live at the property, it's classified as owner-occupied. This type of situation can occur if you own a multi-unit home such as a duplex -- you live on one side, and your tenant lives on the other.

Different Property Occupancy Implications

Typically, loan approval requirements are slightly relaxed, and interest rates are lower for owner-occupied primary residences. When buying a new home, the lender will expect you to move in within 30 days after the closing if the property is intended to be a primary residence.

Second homes and investment properties often carry higher interest rates than primary residences. You'll also need to have an excellent credit history and earn enough income to support multiple payments. Most lenders also require a higher down payment.

Income tax deductions are another factor in play. You can deduct mortgage interest and property taxes on your federal income tax return -- but only on your primary residence that you occupy most of the year.

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