Mortgage Eligibility: Occupancy Matters
When you apply for real estate financing, you must tell the lender whether the house will be your primary residence, a vacation property, or a rental / investment. This is part of qualifying for a mortgage.
The status of the house is important because second homes and rentals are more risky to finance. Fannie Mae, for example, add a 30.375 percent charge for a rental home with 20 percent down payment.
Additionally, most government guaranteed loans do not authorize second homes or rental properties.
Check your new rate (May 31, 2021)
What if you live in two houses?
What if you live in two houses roughly equally? Can you finance them both as primary residences?
It depends. Lenders resolve these issues on a case-by-case basis and look at several variables:
- Distance: How far are the two houses?
- Work: Does your work create the need for two houses?
- Family: Has your family grown to the point that you need an additional house? Or do you have a dependent for whom you are buying property?
The US Department of Housing and Urban Development (HUD), which administers the FHA mortgage program, is clear.
The FHA will not insure a mortgage if it is determined that the transaction was designed to use FHA mortgage insurance as a means of securing investment property, even though the property to be insured will be the only property held at the time. help from FHA Mortgage Insurance.
Case by case
Here are the situations in which HUD will allow buyers to have more than one primary residence.
You can get an FHA insured mortgage without selling your old home. You must move at least 100 miles, and your move must be job-related.
For example, you can work from an office in your hometown and also at your company headquarters in another state. If you are buying a home near your other office, you would likely be able to finance the new home as your primary residence.
Increase in family size
You may be eligible for a second primary residence if your family has grown too large for your current home and the loan-to-value ratio (LTV) is 75% or less.
This is useful if you are moving in with other family members to share expenses or to care for aging parents, children or grandchildren. You can also purchase a home for your child or dependent parent as a primary residence with the FHA “Kiddie Condo” program.
To break up
You may qualify for another principal residence mortgage if you permanently move out of your current home, but the co-borrower on that loan will continue to live in the home.
Ideally, this person would refinance and take you out of the loan completely, but that’s not always possible.
If you are a non-occupying co-borrower of a third party’s primary residence, you can still finance your own primary residence.
However, co-borrowing creates what lenders call “contingent liability,” which means that certain circumstances might require you to be responsible for paying for that property. If the occupying co-borrower fails to make the mortgage payments, you will have to pay them.
Often, lenders will ignore contingent liabilities in your debt-to-income ratios if the co-borrower has been successfully making payments for a while. Fannie Mae said:
The lender must obtain the most recent canceled checks (or bank statements) from the most recent 12 months from the other party showing a satisfactory payment history of 12 months. There should be no overdue payments for this debt in order to exclude it from the borrower’s debt-to-income ratio.
If you are trying to buy a primary residence while you own yet another, the transaction must make sense. If you are buying a new home in the same city and are considering converting the old home into a rental, it helps to provide a rental agreement.
You may also need to have at least 25 percent of the equity in the old home for the new one to qualify as a primary residence. This requirement is a holdover from the days when underwater owners bought new homes in the same city and then moved away from their old homes.
Lenders will likely decide your fate on a case-by-case basis. It is a good idea to document your need for two main houses as much as possible. The easier it is to get your application approved, the more likely you are to get what you want.
What are the mortgage rates today?
Current mortgage rates differ depending on whether you are borrowing against a primary residence (the least risky and cheapest to finance), a second home (stricter guidelines and sometimes risk-based surcharges), or a rental / investment property. (the riskiest and the most expensive).
This is why, if you can, you want to finance your home as your main residence.
Check your new rate (May 31, 2021)