When it comes to investing in real estate, purchasing income properties can be the biggest hurdle to overcome - especially for those who wish to get into real estate investment in the first place. However, many real estate investors can rely on something called an “owner-occupied” home to build rental income as well as save on housing costs. Here’s what you need to know about how to qualify for an owner-occupied home.
An owner-occupied home is any property in which you, as the owner of that property, also use the home on that property as your primary residence. The arrangement is most often used by real estate investors who both live in a property and also provide separate spaces to tenants for rent.
Owner-occupied homes are ideal for real estate investors because they can help you meet your investment goals in several different ways, most often through advantageous financing options. Real estate investors often can’t find the same types of attractive home lending terms as those who are purchasing a residential home exclusively to live in. However, with an owner-occupied home, you’ll still have opportunities to create rental income by providing unused spaces to tenants for rent.
Did you know that it can actually be harder to find a lender that’s willing to provide you financing for a second property than it is to find a lender who will provide you a mortgage for an owner-occupied property? There is a number of reasons why this is, but most lending institutions feel that when you’re also living in the same property that you’re renting out to others, you have more of a vested interest to continue to pay your mortgage on time.
This results in you being a better risk than if you were financing a second property you wouldn’t be living in. This is why lenders often offer better interest rates to borrowers who want to purchase an owner-occupied property as an incentive. It’s a win-win scenario: your lender feels that you’re less likely to default on your mortgage, and you’ll have the benefits of a more affordable loan that helps you maximize the income you’ll be able to make off of your tenants.
If you’re interested in gaining access to the most attractive mortgage rates and terms possible and still be involved in real estate investment, it’s a foregone conclusion that you’re going to want to pursue qualifying your property as an owner-occupied home. However, there are some stringent guidelines that you’ll need to meet if you want to unlock these opportunities.
First things first: once you purchase a property, for it to qualify as an owner-occupied home you’ll need to move into that property no later than 60 days after closing. Not only that, but you’ll also have to remain living there for a minimum of 12 months before lenders will consider you an owner-occupant. Be aware, however, that mortgage lenders can have their own guidelines for what qualifies as owner occupancy, so check beforehand.
Once you do qualify as an owner-occupant, you’ll have several financing options open to you that you wouldn’t otherwise, such as if you were an absentee owner and lived elsewhere. Here are a few of the most common and useful ones that you should consider.
With backing from the Federal Housing Administration, an FHA loan has extremely low credit requirements and can be obtained for down payments as modest as 3.5 percent. Additional benefits of an FHA loan include having the closing costs added to the loan so you don’t have to pay them upfront. As these loans are only available to a homeowner that will be using the property as their primary residence, they’re a good choice for owner-occupied status. This is because you can purchase a property with up to two units, allowing you to turn the other unit into an income property.
If you’re a military member or a military veteran, you can avail yourself of a VA loan, backed by the US Department of Veterans Affairs. These mortgages have no down payment requirement; instead, you’ll need to pay a funding fee. Additionally, you’re not required to maintain private mortgage insurance either. VA loans also permit you to purchase a property with as many as four units, as long as you’re the owner-occupier of one of those units. This makes a VA loan a very attractive option, provided you can qualify for the loan in the first place.
So-called “traditional” lending isn’t backed by any government agencies, which means that they’re typically more difficult to qualify for by having a higher credit score requirement and a debt-to-income ratio of no more than 50 percent. Yet you can often find loans with down payment requirements as modest as 3 percent. As to whether you can qualify for owner occupancy, again you’ll need to ask your lender about what their specific guidelines are so that you can make an informed decision.
Investing in real estate is a major endeavor that requires a lot of dedication and organization on your part. Working with a solid real estate CRM platform is one requirement, as this keeps you on task and helps you manage your tenants and their needs. Yet the entire process is made much easier when you have an owner-occupied property. Not only will you be able to reap the rewards of more attractive financing, but you’ll also be on-site to help respond to tenant issues and problems quickly and decisively. Being a real estate investor isn’t for the faint of heart, but with an owner-occupied home, it becomes much easier than it would be otherwise.