Demystifying Conventional Loan Occupancy Requirements

Conventional loans have become an increasingly popular option for homebuyers in recent years. With competitive interest rates and flexible qualifications, it’s easy to see the appeal. However conventional loans come with certain occupancy requirements that you need to be aware of.

In this comprehensive guide, we’ll break down everything you need to know about conventional loan occupancy rules.

What is a Conventional Loan?

First, let’s start with a quick refresher on what exactly conventional loans are. Conventional loans are mortgages that are not backed by the government. This includes loans backed by Fannie Mae and Freddie Mac.

The most common types of conventional loans are:

• Conforming loans – Mortgages that meet the limits set by Fannie Mae and Freddie Mac. For 2022, the conforming loan limit is $647,200.
• Non-conforming loans – Also known as jumbo loans, these mortgages exceed the conforming loan limits.

Conventional loans typically have more flexible qualification requirements than government-backed loans like FHA and VA. Borrowers usually need a minimum credit score of 620 and a down payment as low as 3% to qualify.

Now that we’ve covered the basics, let’s dive into those occupancy rules.

Occupancy Types for Conventional Loans

When applying for a conventional mortgage, you’ll need to state what type of occupancy you intend for the home. There are three main occupancy types:

• Primary residence – The home you live in as your main home. This is where you spend most of your time and is usually the address listed on your driver’s license, tax returns, etc.

• Second home – A secondary residence like a vacation home or lake house. You don’t live here full-time but do occupy the home for a portion of the year.

• Investment property – A property that is purchased solely to generate rental income. You do not live in the home at all.

The occupancy type you choose will impact your loan terms and requirements. Primary residences generally have the most favorable terms while investment properties have stricter criteria.

Primary Residence Occupancy Requirements

As a primary residence, conventional loans will have the lowest down payment options and interest rates. Here are some key requirements to qualify for a primary residence conventional loan:

• Intend to occupy within 60 days – You’ll need to move into the home as your primary residence within 60 days of closing.

• Occupy for at least 1 year – Most conventional loans require you to live in the home as your primary residence for a minimum of 12 months.

• Exceptions – Active duty military personnel who cannot occupy due to deployment can still qualify for a primary residence loan.

• Owner occupancy – Only one borrower needs to occupy the property. For loans with multiple borrowers, you can still qualify for a primary residence loan if only one person lives in the home.

• Occupancy affidavit – You’ll sign an affidavit at closing confirming you intend to occupy the property within the required timeframe.

Providing false information about your occupancy intentions could be considered mortgage fraud.

Second Home Occupancy Rules

If you want to buy a vacation home or seasonal property, you’ll need a second home conventional loan. Here are the occupancy specifics for second homes:

• Limited to one-unit dwellings – Second homes can only be single-family homes, condos or townhomes. Multi-unit properties don’t qualify.

• Occupy for some portion of the year – You need to personally use the home for at least 2 weeks or more per year.

• Exclusive control – You maintain full control over the home and cannot rent it out full-time.

• Suitable for year-round use – The property must be suitable for year-round habitation even if not occupied year-round.

• Higher interest rates – Expect to pay 0.125% – 1% higher interest compared to primary residence loans.

• Ineligible for HARP – Second homes don’t qualify for the Home Affordable Refinance Program (HARP).

Occupancy Rules for Investment Properties

Investment properties have the strictest occupancy requirements when using a conventional loan. Here are the key guidelines:

• No occupancy required – You are not required to live in the home at all. The property is used solely to generate rental income.

• 20-25% down payment – Minimum down payments are much higher, often between 20-25%.

• Higher interest rates – Interest rates run around 0.5 – 1% higher for investment properties.

• Limited financing options – Investment properties don’t qualify for special programs like doctor loans that offer 100% financing.

• Ineligible for HARP – Investment properties cannot be refinanced under HARP.

• Documented rental income – Lenders will require leases to verify rents used to qualify.

Make sure to disclose if you do plan to live in the property temporarily while getting it ready to rent. Interim occupancy needs to follow second home requirements.

How to Avoid Occupancy Fraud

Clearly, qualifying for a lower primary residence rate when you actually plan to use the property as a rental would be incredibly tempting. However, misrepresenting your intended occupancy is mortgage fraud and has serious consequences if caught.

Here are some tips to avoid occupancy fraud when applying for a conventional loan:

• Be upfront about any plans to rent the property in the future, even if you do plan to live there initially.

• Do not apply for an owner-occupied loan on behalf of a relative or friend. Signing for someone else is illegal.

• Review your mortgage contract before turning your primary residence into a rental, even for legitimate reasons. Make sure you comply with any initial occupancy period stated.

• Contact your lender proactively if your circumstances change. Provide documentation that supports the reason for moving out early.

• Maintain records proving you intended to occupy the home. This includes closing documents, mortgage contract, change of address, etc.

Being transparent with your lender and providing documentation is key to avoiding occupancy misrepresentation.

Options for Getting Out of Owner Occupancy

Sometimes situations change that require you to move out of a home purchased as your primary residence before you meet the minimum occupancy period. This might include:

• Job relocation
• Family emergency
• Change in marital status
• School district change

While turning your primary home into a rental early violates most occupancy clauses, you do have options. Here are some tips for getting out of owner-occupancy without committing fraud:

• Notify lender in advance – Contact your lender before renting the property to explain the situation. Provide documentation supporting reason for move.

• Prove primary residence intent – Show records like the mortgage contract and closing documents that confirm you planned to live in the home long-term initially.

• Establish a timeline – Create a dated paper trail that led to the move such as job transfer memos, texts, or medical records.

The key is proving that your change in occupancy plans was necessitated by an unforeseen situation and not premeditated fraud. As long as you’re transparent with your lender early on, it is possible to legally get out of an owner-occupancy requirement.

The Bottom Line

Hopefully this guide provides helpful clarity on the occupancy requirements for different types of conventional loans. To recap the key points:

• Primary residences have the best terms but require you to live in the home.

• Second homes have slightly higher rates and must be suitable for year-round use.

• Investment properties have strict requirements including 20% down and full documentation of rents.

Being transparent about your true occupancy intentions is critical to avoid mortgage fraud. But if your plans change down the road, work closely with your lender to legally transition a primary home into a rental.

Following these conventional loan occupancy rules will ensure a smooth process whether you’re buying a forever home, vacation retreat or investment opportunity.