How owner-occupied vs non-owner-occupied can affect your financing!

Home mortgage disclosure actHave you ever received a bill that was higher than you anticipated, and when you looked it over you found that there were one or more “additional fees” you were unaware of? It can happen with housing, too.

Among all the specialized terminology relating to real estate and mortgage financing, the definitions of owner-occupied and non-owner-occupied seem pretty straightforward. However, many people don’t realize right away that the occupancy type of a home can dramatically change the financial aspects of financing and owning property much like getting a bill for more than you expected. Depending on how much wiggle room you have in your budget, unexpected extras could put a damper on things. By educating yourself ahead of time, you can prepare yourself and avoid unpleasant surprises.

Rent-to-own: Non-owner-occupied and owner-occupied options

When it comes to rent-to-own financing like a lease option or contract for deed, you want to be sure you understand which category each falls under. As previously stated, the definitions of occupation status are fairly simple and straightforward. A non-owner-occupied home is one that the owner is not currently living in or that is not the owner’s primary residence. An owner-occupied home is one where it is the homeowner’s primary residence. So, what does a lease option or a contract for deed fall under?

A lease option is a landlord–tenant relationship until the purchase of the home is complete. That means under a lease option, the property is non-owner-occupied. A contract for deed is a sale at the inception of the agreement, similar to a bank mortgage, putting it into the owner-occupied category. These are important distinctions when it comes to financing, insurance, and property taxes.

Financing

Before a lender determines the interest rate to charge, they will want to know if the property will be owner-occupied or not. Loans for a non-owner-occupied property are charged at higher rates because they are considered higher risk. Statistically, non-owner-occupied homes are more likely to be defaulted on. Therefore, higher risk equals higher interest rate. 

If you are considering a lease option, the owner of the property is likely to be paying a higher interest rate if they are paying a mortgage. This cost will be wrapped up in your monthly payment. Lease options generally include a timeframe for when the borrower is required to purchase the home with a bank loan. When you apply for a bank mortgage you will borrow as owner-occupied if you plan on continuing to live in it and not use it as a rental or secondary property.

Under a contract for deed agreement, also called a land contract, you generally receive many of the rights of homeownership. You have equitable interest, tax write-offs (property taxes, interest, etc), and documentation that is filed at the county. Be careful to ensure the existing owner makes all of their underlying mortgage payments to ensure a higher lien does not impact your agreement. Just as with the lease-option, when you are in a better position to apply for a bank loan, you will be able to do so as owner-occupied and should be able to get a lower rate.

Anyone looking to purchase a property as a secondary residence or an investment property to rent out, including via Airbnb, should expect to pay that higher rate.

Insurance

Just as with bank loans and financing, the insurance industry also relies heavily on benefits and risk analysis. Statistically, owner-occupied homes are generally better cared for. Repairs are made in a more timely fashion before more damage can occur, and more security measures are often in place. Because of this, homeowner’s insurance rates are also higher for non-owner-occupied homes. 

For those purchasing a home through a lease option, you are not yet the owner, so you will need to purchase renters insurance while the property owner purchases rental insurance. Since a contract for deed is similar to a bank mortgage, just minus a bank, you will normally be required to purchase homeowners insurance. While you will want to discuss options with your insurance company, if you will be living in the home, it is generally considered owner-occupied. Funds for insurance and property taxes are usually required to be placed in escrow just like it would if it were a mortgage through a bank.

Property taxes

Under a lease option, the renter is not responsible for paying the property taxes directly but, as with any of the other costs, it is generally included in the monthly payments. The terms change a little here and non-owner-occupied properties fall under the non-homestead designation which is taxed at a higher rate.

While laws may vary from state to state, those purchasing through a contract for deed generally gain all the benefits—and the responsibilities—of homeownership. When the property being purchased is being lived in by the purchaser, the property will fall under the homestead designation, which is taxed at a lower rate. Be sure to verify the laws for the state in which the property is located.

Occupancy fraud

Because of the difference in risk factors and rates, lenders, insurance companies, and tax assessors take these designations very seriously. When a borrower lies about who will be living in the home, it is called occupancy fraud. That definitely costs more than anyone expects. It’s important to follow the laws.

Can a home be both owner-occupied and a rental?

As a matter of fact, yes. However, you will want to verify specifics with your lender, insurance agent, and tax assessor’s office to make sure you are properly following any policies or laws.

Single-family homes

With a single-family home, it is possible to be the owner-occupier while renting out a portion of it as long as you live in the main area. For example, you can rent out a room or basement apartment as long as you are occupying the bulk of the home yourself. You can even rent parts of the land for use as well.

Multi-family real estate

Multi-family dwellings like duplexes are even easier to determine. The property owner can live on one side while renting out the other so that the property is owner-occupied. In fact, this is a great way to take advantage of investment benefits and cost savings. It is often called “house hacking“.

Benefits of rent-to-own 

Forewarned is forearmed! Now that you know how occupancy type can affect the costs of homeownership and how it relates to rent-to-own options, you can plan ahead to make better decisions. If you are tired of renting but aren’t quite able to get a bank loan, or you’ve already been denied, a rent-to-own option might just be your bridge to homeownership. Lease options and contract for deeds offer more advantages than simply renting while giving you time to get your financial ducks in a row. If you want to know how to find rent-to-own options read. 

Private money lenders for owner-occupied properties

Set Your Rent - Jon and AdamAdam Zach and Jon Enright are the creators of Set Your Rent and provide a variety of custom housing options to future homeowners through a unique renting option. Here at Set Your Rent, we have developed a new tool that allows you to pick any home listed for sale and live in it. We specialize in rent-to-own and seek to help individuals and families gain homeownership to live the American Dream.

Set Your Rent partners with people who don’t qualify for a traditional bank loan but make a good income, have a down payment, and are tired of renting and want to own their own home. 

https://www.youtube.com/watch?v=xVV35AwfY5I 

By raising capital to purchase homes for people who are not able to get financed through traditional options, Set Your Rent creates a 1–5 year bridge that allows buyers to have many of the benefits of homeownership while they work to obtain a bank loan.

Resources

Set Your Rent Flow Chart

This interactive Mind Map is the perfect tool to help you identify the best financing path for your situation. Start with “Have You Tried to Get a Bank Loan?” Follow your answers to land on 1 of 4 options LINK https://setyourrent.com/interactive-flow-chart/ 

The Pre-Approved Podcast

Becoming a Homeowner When The Bank Says No. This podcast is dedicated to the 1 in 10 homeowners denied each year by the banks. We will discuss Rent-to-Own, Lease Options, Contract for Deed, Qualifying Mortgages, Non-QM Loans, and Private Mortgages. LINK https://setyourrent.com/the-preapproved-podcast/

The Nine-Step Process for Tenant-Buyers Using Set Your Rent

Read more about this process to learn about how the rent-to-own process can work for you.{link- https://drive.google.com/file/d/1p3UfZGJ2TGbysLGt1qVPFQ54vbVoGeeq/view }

Set Your Rent Blog Posts

Simple optimization of your credit score to qualify for a home loan: How to increase your credit score if you are in a rent-to-own agreement or contract for a deed home since you’ll inevitably have to finance your house in your own name at some point.  LINK https://setyourrent.com/optimizing-your-credit-for-lease-to-own/

8 steps to getting a home through set your rent: While we always recommend trying to exhaust all resources to get a bank loan first if you have been denied Set Your Rent can help. LINK https://setyourrent.com/steps-to-getting-a-home-through-set-your-rent/ 

Rental vs lease option vs contract for deed: While most people are familiar with renting an apartment or home, the terms Lease Option or Contract for Deed can create confusion. Read more to understand the key differences and what’s best for you.  LINK https://setyourrent.com/rental-vs-lease-option-vs-contract-for-deed/ 

What you need to know about rent-to-own: The key benefits of rent-to-own  LINK https://setyourrent.com/what-you-need-to-know-about-rent-to-own/

Saving a down payment for your lease to own: Saving money for the deposit doesn’t have to be hard. LINK https://setyourrent.com/what-you-need-for-completing-a-lease-to-own-contract/  

Selecting a real estate agent: If you are looking for a lease-to-own home and are not sure where to begin, a high-quality realtor should be your starting point. LINK https://setyourrent.com/selecting-a-real-estate-agent-for-lease-to-own/ 

Don’t just take our word for it. Listen to the people we have already helped! LINK https://www.youtube.com/playlist?list=PLUY8Uy2fQwnNZp4LwU_gPQvofB1GGy9JH 

FAQs LINK https://setyourrent.com/questions-and-answers/