Understanding owner-occupied properties: What investors should know

Real estate investors looking to expand their investment portfolio may want to buy an owner-occupied property. For beginners, this financing setup can provide an entry point into real estate investing.

What does owner-occupied mean?

It helps to know that owner-occupied property refers to a property where the title holder and owner uses the home as their primary residence. For example, an owner of a large home who rents out spare rooms to tenants while living on the main floor of the house has an owner-occupied property.

In terms of real estate investing, owner-occupied properties offer many benefits to investors, especially in terms of financing. Generally, homeowners buying a primary residence get more favorable mortgage terms and conditions than if they buy a home they don’t live in. You also can earn recurring revenue in the form of rental income.

Owner occupancy guidelines

The big benefit of an owner-occupied property is you can get more favorable financing. To qualify as an owner-occupant for investment and financing purposes, you also need to meet eligibility requirements.

For example, you typically need to move into the property within 60 days of closing on your mortgage. Also, you’ll be required to live on the property for at least 12 months for lenders to qualify you as an owner-occupant.

Some lenders also let you finance the property as an absentee owner, meaning you don’t live in the home. Someone who buys a home with multiple units and rents them out without living on-site would qualify.

At the same time, each lender has its own guidelines for owner-occupancy. It’s important to read the fine print of your lending agreement to ensure that any plans you have for renting out the property or living off-site don’t violate the lender’s requirements.

Failing to understand these terms and operating at odds with the lender's stipulations could be considered mortgage fraud. Noting this, it’s important to be aware of any specific eligibility criteria that you are agreeing to under the terms of an owner-occupied property loan product.

Owner occupancy and real estate investing

It’s generally easier to finance an owner-occupied property than a second home or investment property. Interest rates also are usually lower on mortgages for owner-occupied dwellings, as lenders don’t envision that they’ll sit vacant for any significant length of time.

Financing an owner-occupied rental could be a great way to start investing in real estate. That’s because it’s typically less time-consuming, costly, and challenging to finance the purchase. You also can live in one unit and rent the rest. Many real estate investors use rental income to more quickly pay down their mortgage and pay off any debts they owe.

The advantages and disadvantages of owner-occupied rentals

For starters, let’s take a look at the pros of owner-occupied property investments.

• Easier financing: As an investor, you’ll only need to one mortgage for a real estate holding that functions as both a home and an investment property. Doing so can be both more affordable and easier to manage than financing multiple properties simultaneously.
• On-site supervision: Because you’re on-site, it’s easier to manage the property more efficiently. You also can make sure tenants are following rules and regulations, and keeping their units in good condition.
• More choices for loan options: Owner-occupied property investors have more loan choices and more affordable financing options.

Of course, there are also potential disadvantages to this method of financing that you’ll want to consider as well.

• Sharing your home with renters: Not all owners will want to live in close proximity to their tenants. Sharing space also won’t be ideal for owners in all living situations, such as those with young children. There’s also the matter of being seen as more readily available and on-call by tenants to consider as well.
• Difficulty in finding tenants: It could be harder to find renters, given that prospective tenants may not want to live with a landlord close enough to potentially peek over their shoulder.
• More responsibilities: Being a landlord is a time-consuming task under the best of circumstances. Managing rental properties isn’t easy, and can become even more complicated if renters frequently seek you out. If juggling a heavy workload isn’t for you, you may wish to find a property management company to assist with upkeep.

Financing options for owner occupants

Owner-occupied properties are eligible for financing through a variety of different loan products, providing aspiring investors with more choices when it comes to comparing loan types and financing.

• Conventional loans: Not backed by the government, conventional loans come with stricter requirements attached. Most lenders require a minimum credit score of 620 and a DTI ratio of 50% or less. On the bright side, down payments may be as low as 3%. All those who wish to apply should also be aware of specific owner-occupancy stipulations presented by individual lenders – read the fine print before applying.
• Federal Housing Administration loans: Financing an owner-occupied property through an FHA loan can be advantageous. That’s because FHA loans allow for down payments as low as 3.5% for select borrowers whose credit score is 580 or higher. More flexible DTI requirements, competitive interest rates and the ability to roll closing costs into the loan are also a plus. That said, the property must be used as a primary residence, and owners must move in within 60 days. You can use an FHA loan to purchase properties with up to four units.
• Veterans Affairs loans: VA loans are available to members of the military, active-duty service members, and their eligible spouses. While all loans include a VA loan funding fee, financing options may allow for certain applicants to waive the down payment. Buyers can use a VA loan to buy properties with up to four units, but the property must be used a primary residence, and owner-occupants must move in within 60 days of closing.

The bottom line: Weigh the pros and cons before investing in an owner-occupied property

Owner-occupied property presents a way for real estate investors to get started investing or add to their portfolio of holdings under approachable arrangements and affordable terms. It also presents the possibility for interested parties to earn regular, recurring revenue by renting out spare rooms and acting as a landlord for tenants.

At the same time, lenders require purchases to understand and comply with specific owner-occupancy stipulations, and borrowers need to ensure that they do not violate the terms of their loan. Before going this route, you’ll want to weigh the pros and cons to determine if the form of real estate investment is ideal for your individual needs and finances.

Curious to find out more about how you can get started with owner-occupied property? Simply get in touch to find out how Rocket Mortgage^® can help today!