Non-Owner Occupied

Non-owner Occupied in real estate is a classification that denotes properties, mostly homes, not occupied by the owner. The individual will have their residence elsewhere and would have leased the property. Additionally, this property would have been purchased through a mortgage, which makes the classification necessary.

The elevated risk for lenders in financing properties not occupied by the owner, stemming from a higher likelihood of borrower default, is mitigated by imposing higher non-owner occupied mortgage rates. This risk management strategy is commonly observed, especially in the case of properties like vacation homes.

Key Takeaways                                                               

• Non-owner occupied is a real estate classification for residential homes not inhabited by their owners. It is often used for renting or investment purposes to assess the lender's risk in providing loans to non-occupant owners.
• Vacation homes and one to four-unit rental units fall under this classification, while rental apartments or multi-family residential facilities with more than four units do not qualify.
• Owners may secure loans to purchase such properties for investment or to fund repairs and renovations, making the house suitable for leasing.
• It serves to evaluate the risk for lenders providing loans to individuals who do not reside in the properties they own.

The non-owner occupied classification holds significant importance for lenders, mainly when individuals acquire homes either for residence or investment purposes. There is a notable distinction in how banks evaluate these two scenarios, with a heightened risk for lenders when the owner intends to purchase and rent out a house.

As a result, homeowners need to clearly specify the purpose of their purchase when seeking a loan from the bank. The bank, in turn, determines the interest rate based on this purpose. This process is ongoing, and the homeowner needs to notify the lender if they decide to rent out a residential property or occupy a previously rented house.

In the event that an owner moves out of their residential property and begins renting it out, the lender typically increases the mortgage rate to mitigate their risk exposure. This adjustment is a legal requirement to prevent occupancy fraud, a common occurrence where borrowers falsely claim owner-occupancy to secure lower interest rates.

Non-occupant owners can borrow from the bank for purposes beyond mortgages. Non-owner occupied renovation loans exemplify this, where homeowners with existing property ownership borrow to fund repairs and renovations before renting out the improved house.

An essential characteristic of this classification is its application to one to four-unit rental properties, excluding apartments that can be rented to more than four tenants or families. Additionally, insurance for non-owner occupied homes should be obtained before they are leased out to tenants.

Consider the examples below to understand the concept better.

Example #1

Suppose Kate, residing in New York, decides to utilize her parents' property in Nevada by renting it out. Recognizing the need for repairs and renovations before leasing, she approaches a bank to apply for a renovation loan tailored for non-owner occupied properties. The bank approves a $50,000 loan at an 8% interest rate. To cover renovation costs and generate profit, Kate rents out the house at $5,000 per month.

It is essential to consider local market conditions, loan terms, and legal aspects, such as landlord-tenant laws, before engaging in property rental. It is crucial to consider factors, like local market conditions, loan terms, and legal considerations, including landlord-tenant laws, when venturing into property rentals.

Example #2

Banks in the United States are facing substantial losses due to the surplus of office space, primarily attributed to increased vacancies following the COVID-19 pandemic and the widespread adoption of remote work even after lockdowns. The first quarter of 2023 saw an average office vacancy rate of 18.6%, marking a 5.9 percentage point rise from the last quarter of 2019.

Forbes has identified three banks with significant exposure to potential losses amid the ongoing office space crisis. These banks, along with their respective non-owner occupied commercial real estate were compared to Tier 1 Common Equity. The ratio obtained listed Valley National Bank (485%), East West Bank (230%), and Synovus Financial (196%) as the three banks exposed to substantial losses.

Usually, a residential unit can have two statuses – occupied or vacant. When occupied, the occupant might be the owner or the tenant. It is a simple idea, but the rules and legal requirements differ depending on who the occupant is.

Let us understand this in detail.

In essence, whether a property is non-owner occupied or owner-occupied, both involve legal distinctions based on occupancy status, highlighting the significance of understanding the roles of owners and tenants in residential units.