How Owner-Occupant Rules Can Help Your Purchase a Home for a Loved One
Who is the “owner-occupant” in a home?
For most properties, it’s easy: the home-owner. The typical mortgages/homeownership situation has a person that purchased the home and lives there on a permanent basis, either alone or with his or her family.
But what about investment properties, such as rental housing? If you own a home that is rented to tenants, there is no owner-occupant.
Why does this matter?
Because having an “owner-occupant” creates less risk to the lender, which means they are more likely to write a loan. A loan on someone’s primary house, where they and their family live, is less likely (statistically speaking) to see default than an investment property. After all, if you lose your job and can only make one payment, which would you pay, your home or your investment property? Most people would make payments on their home and risk losing their investment, as opposed to the opposite.
Being the owner-occupant when seeking a mortgage loan creates lower interest rates, as well as other benefits, but what if you are purchasing a home with another borrower or purchasing a home for a loved-one who can’t support themselves financially?
While owner-occupant is important, Fannie Mae does allow for certain situations where you can purchase a home and get the benefits of being an owner-occupant, even if you don’t live there…
How to Be an Owner-Occupant, Even if You Don’t Live at the Property
A primary residence in which you are the owner-occupant creates many advantages, but second homes and investment properties are often tied to significant mortgage requirements and, in some cases, higher costs for borrowers.
For example, a second home often needs to be 50 to 100 miles from your primary residence, which does not create a lot of convenience when purchasing a home for your child or parent. Maybe you could purchase the home as an investment property. Not only will you likely see higher interest rates, you’ll also be asked for a significant down payment, as high as 30% in some cases!
Clearly, being listed as the owner-occupant brings significant advantages, and there are three specific situations that allow you to use this benefit…
For multiple borrowers, only one borrower will need to be occupying the home and take title of the property. However, there are exceptions that come up if the mortgage has guarantors or co-signers. These exceptions are laid out by Fannie Mae in their explanation of guarantors, co-signers, and non-occupant borrowers.
Co-owning a home with friends or relatives can have many benefits but there are also a few downsides. Multiple borrowers, in most cases, will make loan qualification easier and faster. Because you have more borrowers, the risk to the lending institution is spread, so they may be more likely to issue a loan. Multiple lenders mean multiple incomes and multiple assets, so lenders may be more likely to work with you.
However, multiple borrowers can also create challenges to ownership. Walking away from a mortgage becomes more complex when there are multiple parties involved. For example, if you and your friend have a dispute over ownership percentages, it can tie up your sale in a web of legal paperwork and possibly even court appearances. The most common issue comes from when one person can’t or won’t pay their share of the mortgage, creating uneven pressure on the other party.
Multiple borrowers, however, can open new opportunities. As long as one borrower occupies the home, you can reap the benefits of multiple borrowers for more-affordable housing or easier loan qualification.
Parents and Legal Guardians of Occupant
In some cases, an adult is unable to work and his or her parents wish to purchase a home for this individual. There can be many reasons for this situation, but it is usually related to the adult child being physically handicapped or developmentally disabled. In this case, if the child is unable to work or does not have the income to qualify for a mortgage, the parent or legal guardian can qualify for the loan and, despite not living there, be listed as the owner-occupant.
Buying a home for a disabled child can be extremely beneficial, providing quality housing to the child while giving peace-of-mind to the parent. To qualify, the parent will need to bring proof of the child’s disability. If the child is able to work, you will also need to bring pay stubs from the place of employment, as well as proof of any social security payments or other income related to the disability. Essentially, you need to prove that adult child can’t qualify for the home on their own, despite their current income.
Children of Occupant
With an aging population, the need for adult children to purchase a home for their parents is becoming more common. In this situations, the requirements are similar to the parent purchasing a home for the disabled child. You will need to prove that the parent is unable to work and does not have the means to support the mortgage on their own. When a child purchases a home for the parent, they can be listed as the owner-occupant, even when they do not actually occupy the property.
In this case, the parent does not even have to be listed on the loan. That’s right, you can purchase a property for your parent and they can have no financial responsibility (or risk) tied to the mortgage loan. Essentially, this option allows you to purchase a home for your parent while receiving the same advantages as purchasing a home for yourself. You’ll get the better rates, fees, and lending flexibility that you would on your own home. If this special provision was not provided by Fannie Mae, children would have to purchase homes for their parents as if it were a second home or investment.
Guiding You Through Fannie Mae Requirements
If you want more information about a mortgage loan for family-related housing, contact the team at San Diego Purchase Loans today. We’ll help you understand the specifics of Fannie Mae requirements so you can make a fully informed decision.