The Challenge of Distinguishing Owner-Occupied Mortgages From Investor Mortgages
Understanding the borrower’s intention for a property is a key factor in a lender’s mortgage application decision. Because it’s often safer to approve clients buying a residence for themselves, lenders often provide better rates for owner-occupied mortgage loans. Unfortunately, some borrowers might misrepresent their application in order to receive this lower rate. Having a process in place to review investor applicants more thoroughly helps prevent lenders from unknowingly extending the wrong offer.
An owner-occupied property is generally understood and defined as one where the borrower buys with the sole purpose of residence. If the borrower buys a second property, such as a vacation home, it can also be included in this category. However, restrictions state that the secondary property must not be located near the borrower’s primary residence. Additionally, the borrower cannot buy a secondary property with the main intention of renting it out.
Non-owner-occupied properties are typically purchased with the goal of generating rental income. These are deemed as investments rather than residences.
Owner-occupied mortgages are generally viewed to somewhat safer because borrowers tend to be more responsible with these properties. Historically, borrowers have been shown to less likely to default on their homes than on investment properties, especially if the investments start losing money. Borrowers will also likely take better care of their own homes, resulting in higher property value. If the borrower must default, the lender at least gets to reclaim a better-maintained property.
Misrepresented loan risk
Some borrowers misrepresent their application in order to receive the owner-occupied rate on an investment property. This could be a significant risk for lenders. First, a lender could miss out on a higher income by offering the wrong rate. More importantly, this could lead to a loan portfolio with hidden risk. If the market turns, such lenders could experience more defaults than expected.
Identifying problem loans
It might be difficult for lenders to identify problem loans on their own. Many do not have the tools or resources to keep track of what their borrowers are doing, and they may decide to turn to research firms to help them manage their accounts. For example, mortgage application and point-of-sale offerings from Equifax include detailed information about borrowers, such as hidden debts or mortgages left unreported. These types of solutions can help identify borrowers who already own a primary residence. Tracking current borrowers is another product capability; helping lenders determine whether these borrowers have taken out mortgages with other lenders or if they’ve applied for landlord insurance, which are signs that they may intend to rent their property.
In a perfect world, borrowers would always be completely forthcoming, but sometimes this isn’t the case. The good news is that with some planning and deeper research, lenders can take steps to help make sure that their loans are appropriately classified.