Everything You Need to Know About Non Owner Occupied Mortgage Loans

Non owner occupied mortgage loans also known as investment property loans, are mortgages taken out by real estate investors to purchase properties they do not intend to live in. Instead, these properties are purchased solely for investment purposes like renting out or flipping.

As an investor exploring financing options for investment properties non owner occupied loans can provide an advantageous avenue to grow your real estate portfolio. However these mortgages have unique eligibility requirements, rates, and terms compared to traditional home loans.

In this comprehensive guide, we’ll walk through everything you need to know about obtaining non owner occupied mortgage loans, from costs and qualification to alternatives worth considering

What Exactly Are Non Owner Occupied Mortgage Loans?

A non owner occupied mortgage loan is a financing option designed for residential properties with one to four units that the borrower does not plan to occupy as their primary residence.

These mortgages are intended for real estate investors who want to purchase rental properties or fix and flip homes for profit. The properties can include single family homes, condos, multifamily units, or other small residential buildings.

Non owner occupied loans differ from primary residence mortgages in that the borrower is not living in the home. This is an important distinction when applying, as lenders view and price these loans differently.

Why Do Lenders View These Loans Differently?

Lenders classify mortgages as either owner occupied or non owner occupied. This determines eligibility requirements and loan terms.

For a lender, non owner occupied properties are riskier for a few key reasons:

• Lower motivation to pay – If an owner occupant falls on hardship, they are highly motivated to keep making payments so they don’t lose their home. Investors have less motivation to keep rental properties.

• Higher default risk – Data shows that investors are statistically more likely to default on mortgages than owner occupants.

• Difficulty recouping costs – It’s often easier for lenders to recover losses through foreclosure and sale when a property is owner occupied.

To compensate for the increased risk, lenders charge higher interest rates and require larger down payments on non owner occupied loans. Qualification standards are also stricter.

The Costs and Fees of Non Owner Occupied Mortgage Loans

When shopping for a non owner occupied investment property loan, here are the key costs and fees to anticipate:

Higher Interest Rates

Interest rates on non owner occupied loans can be 0.5 to 1 point higher versus comparable primary residence loans. Factors like your credit, down payment, and property type also impact rates.

For example, with excellent credit you may receive around a 5% rate on a primary home loan. That same borrower may see rates of 5.5-6% for a non owner occupied property loan.

Larger Down Payments

While owner occupied loans allow down payments as low as 3-5%, non owner occupied down payments tend to be 20-30% or higher. This equates to tens of thousands in additional funds required upfront.

Some lenders may offer programs with lower down payments around 10-15%, but your interest rate will be higher. Shop multiple lenders to optimize both rate and down payment.

Shorter Loan Terms

Non owner occupied mortgages often come with shorter 7-15 year loan terms. This results in higher monthly payments, as you have fewer years to pay off the loan. Ask lenders about longer 20-30 year term options.

Strict Underwriting

Getting approved for a non owner occupied loan is not as simple as an owner occupied mortgage. You’ll deal with exhaustive verification of income, assets, and credit. Guidelines are tight, so work to strengthen your financial profile before applying.

Prepayment Penalties

Some lenders include prepayment penalties on non owner occupied loans, meaning you’ll incur fees for paying off the loan early. Try to avoid these programs if you may sell or refinance within a few years.

Higher Closing Costs

Between application and origination fees, expect closing costs around 2-5% of your loan amount. The costs scale with mortgage size. Work closing expenses into your investment property budget.

With higher rates and steeper fees, make sure the potential rental income justifies the added costs of a non owner occupied loan. Do your homework before taking the financing leap.

Eligibility Requirements for Non Owner Occupied Loans

Qualifying for an investment property loan can be more difficult than getting a typical home loan. Here are the key eligibility factors lenders evaluate:

Credit Score

Most lenders require minimum credit scores of 660-720 for non owner occupied loans. The higher your score, the better the rates and terms you’ll be offered. Clean up credit issues before applying.

Debt-to-Income Ratio

Your total monthly debt payments, including the new mortgage, should not exceed 43-50% of gross monthly income. Pay down balances to lower your ratios.

Cash Reserves

Expect to show 6-12+ months of mortgage payments in reserve assets to cover vacancies. 401(k) funds generally don’t count, so save in cash or stocks.

Income Verification

Provide 2 years of tax returns and W-2s, and get ready to document rental income with signed leases. All sources must be verifiable.

Application Questions

Be prepared for pointed questions about your real estate investing experience and plans for the property. Know your numbers cold.

Meeting published requirements is no guarantee of approval. Come with a strong application and financials.

Shopping for the Best Non Owner Occupied Mortgage Lender

Not all lenders work with non owner occupied home loans. Of those that do, offerings vary tremendously. Here’s how to find and choose the right lender:

• Search for investment property specialists – Opt for a lender well-versed in non owner occupied loans vs. your average mortgage provider.

• Compare rates and terms – Stack up offers from multiple lenders to find the optimal combo of rate, fees, and requirements.

• Ask about long-term loans – Seek lenders willing to go beyond the standard 7-15 year terms to maximize payment affordability.

• Inquire about one-time close loans – These allow you to buy and renovate a fix and flip under a single loan and closing.

• Read online reviews – Check third-party review sites to evaluate customer experiences with each lender. Steer clear of repeat negativity.

Vetting lenders upfront saves headaches later. Find a lender aligned with your investing goals and timelines.

Alternative Financing Options for Real Estate Investors

If you don’t qualify for a conventional non owner occupied loan, don’t fret. Plenty of other options exist for funding investment properties:

Hard Money Loans

Hard money loans are offered by private lenders and structured more like short-term business loans. Rates are higher but underwriting requirements are minimal. Ideal for fix and flippers.

Home Equity Loan

If you have sufficient equity in an existing property, a home equity loan or line of credit can provide funds to invest in real estate. Rates are affordable if you have great credit.

Asset Loans

Certain lenders will look at your total assets versus just income to qualify you. This allows high net worth investors to tap into property financing.

Crowdfunding

Real estate crowdfunding pools funding from multiple investors to finance fix and flips or rentals. You pitch deals online to raise capital.

Partners

Team up with other investors to combine down payments and expertise. Split costs and any profits later when the property sells.

All Cash Offer

In hot markets, sellers may accept a competitive all cash offer versus needing to finance. Use cash from other investments to purchase.

Explore all avenues to secure the capital you need to continue building your rental property or house flipping business.

Non Owner Occupied Mortgage Loans: The Bottom Line

Non owner occupied mortgages remain a viable option for real estate investors to tap into financing, despite the strict requirements. As with any investment, crunch the numbers to see if leverage makes sense for your financial situation and goals.

Aim for the most favorable rates and terms by having a strong credit profile, sizable down payment, and proven experience managing investment properties. Seek out lenders specializing in loans for investors versus homeowner mortgages.

Stay organized and persistent throughout the application process. With the right preparation, you can qualify and land optimal non owner occupied mortgage loan terms to fund future rental property purchases.