After you sign on the dotted line, you might think that you are free to do whatever you wish with your new home. But, if you read your documents carefully, you will realize that the opposite is true. For most loans, including those backed by Fannie Mae, Freddie Mac, the FHA and VA, you must occupy the property that your mortgage covers. The restrictions on this clause have gotten even stricter in recent years after so many banks and investors got burned by the housing crisis, which means that lenders are following up on the rule and making sure that it is followed.
Why Does Owner Occupancy Matter?
Lenders are more likely to provide loans to borrowers that are looking for a primary residence. There is something to be said about taking care of the home that you live in rather than the home that you lease out to others. You are more likely to let go of your investment property should your finances become restricted. Your primary home, however, you will likely fight to keep, no matter how tough things might get.
What Does Owner Occupancy Mean?
Owner occupancy basically means that you or at least one of the signing borrowers on the mortgage are going to occupy the property full-time. Some loans, such as those backed by Fannie Mae and Freddie Mac require a 12-month owner occupancy clause in the mortgage documents, which means after 12 months, they will not monitor your occupancy status. Other loans, such as the VA loan, require owner occupancy for the duration of the loan.
Lenders Check on Owner Occupancy
You might think that you can sign your mortgage papers agreeing to occupy the property, but once you walk away from the closing that you can change your plans. This is not true and certainly not recommended. The documents that you sign at closing are upheld by the law, which means that there could be serious consequences if you lie on the application. Many people also think that the lenders will never know if the property is not owner occupied – but they do. Lenders have ways of checking up on owners, including drive-by evaluations, checking on your homeowners insurance to see if renter’s insurance has been taken out as well as checking your property taxes to see if any discounts have been applied for the property being owner occupied.
Exceptions to the Clause
There are certain exceptions that might pertain to your situation, especially if you are doing extensive remodeling to your home. If the remodeling will make it impossible to occupy the home safely, you might be allowed to move out for the time that it takes to make the home safe to live in, but do not make that assumption. It is always best to talk to your lender about your plans before making them. Your lender might make you sign an affidavit stating that you are having extensive remodeling done to the home and that it is not safe to live in while the work is completed. You will likely also have to sign another affidavit stating that you will move in as soon as the work is done, with an estimated date being included in the document. The bank will follow up on your occupancy of the home after the remodeling is complete, so again, make sure that you fill out any forms as honestly as possible.
Owner occupancy is important to banks, which is why they offer lower interest rates and more favorable terms for owner occupied loans. It is much tougher to obtain non-owner occupied loans today, simply because too many banks got burned by investors that were flipping homes. If you do not plan on occupying the home that you were trying to obtain a mortgage on, talk to your lender honestly about your plans to see what your options are to avoid suffering any serious consequences in the future.Click to See the Latest Mortgage Rates»