How Lenders Evaluate Occupancy Types

Caroline McCarthy

14 Sep 2021

Lenders categorize loans based on how the property is occupied. Lenders categorize the occupancy of a property as:

  1. Primary Residence
  2. Second home
  3. Investment Property

The way in which a borrower occupies a property dictates the underwriting guidelines that must be followed before approving a loan (e.g. an investment property can have rental income whereas a primary residence cannot). Moreover, the way a borrower occupies a property helps define the risk profile of the loan.

What You Need to Know

Primary Residence

A property is considered a primary residence if it meets the following criteria:

  • Occupied by the borrower for at least six months out of the year and the address of record for taxes, voter registration, etc.
  • Located within a reasonable commuting distance to the borrower’s place of employment
  • Borrower declares an intention to occupy the property as a primary residence
  • The property must be occupied by the borrower within sixty (60) days of closing or completion

Second Home

A 1-unit property owned by an individual who is also the borrower, occupied by the borrower for some portion of the year and the property must be:

  • In such a location as to function reasonably as a second home (i.e. remote in distance from the Borrower’s primary residence)
  • Suitable for year-round occupancy
  • Available for the borrower’s exclusive use and enjoyment
  • The property must not be:
    • Subject to any timesharing or other shared ownership arrangement
    • A unit in a condominium hotel – aka “condotel”
    • Subject to any rental pools or agreements that require the Borrower to rent the property, give a management company control over the occupancy of the property, or involve revenue sharing between any owners and the developer or another party.

Investment Property

A real estate property that has been purchased with the intention of earning a return on the investment, either through rent, the future resale of the property, or both.

Impact on Interest Rates

The rate for a primary residence is typically less than that of a second home or investment property because the perceived risk to a lender is less because borrowers are less likely to miss payments on the house where they live versus a property they do not occupy or only occupy part of the year.

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