If youâre looking to finance a rental property with no intention to live within the property, then a non-owner-occupied mortgage could be the solution. Letâs take a closer look at this financing opportunity for potential rental properties.
A non-owner-occupied mortgage is a type of mortgage designed for residential properties with one to four units. The twist is that the borrower is not planning to live in the property.
Essentially, if youâre not planning to use the property as your primary residence, youâll need to seek out a non-owner-occupied mortgage. But if you want to finance a large apartment building with more than four units, then this type of mortgage will not work for you.
Non-owner occupied renovation loans allow real estate investors to finance the purchase and renovation of an investment property with a single loan. These loans are growing in popularity among real estate investors who want to add value to a property by renovating it before renting it out or selling it for profit.
In this comprehensive guide we’ll explain everything you need to know about non-owner occupied renovation loans including
What Are Non-Owner Occupied Renovation Loans?
A non-owner occupied renovation loan, also sometimes called an investor renovation loan, is a mortgage that combines the financing for purchasing an investment property with the funds to renovate that property—all in one loan.
With a non-owner occupied renovation loan, the investor doesn’t have to live in the property as their primary residence while repaying the loan. These loans are intended for real estate investors who want to purchase and renovate a rental property, vacation property, or fix and flip investment
How Do Non-Owner Occupied Renovation Loans Work?
Non-owner occupied renovation loans work in a few stages:
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Purchase + Renovation Loan The investor receives one mortgage loan that covers both the purchase price of the property as well as the estimated costs for renovations
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Renovation Period: The investor completes renovations over a set renovation period, typically 3-9 months. The loan is interest-only during this time.
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Permanent Financing: Once renovations are done, the loan converts to permanent financing (like any other investment mortgage) with principal and interest payments amortized over the remainder of the loan term.
Throughout the process, the lender disburses renovation funds in stages (usually after inspection) to ensure the work gets done.
What Are The Benefits?
There are a few key benefits that make non-owner occupied renovation loans appeal to real estate investors:
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Finance purchase + renovations in one loan – No need to coordinate separate mortgages. Investors can buy a property and renovate it with a single loan.
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Often requires only 15-25% down – Significantly less than the 30-50% typically required for conventional financing on investment properties.
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Interest-only payments during renovations – Pay only the interest during the renovation period, keeping payments low while you rehab the property.
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Higher lending limits – These loans are based on the property’s value after renovations, so investors can borrow more.
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Can tap into property equity – If you already own the investment property, you may be able to use a renovation loan to access equity for repairs.
What Are The Requirements?
While non-owner occupied renovation loans provide excellent benefits, they also come with stricter requirements than a typical mortgage:
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Higher credit scores – Usually 620+ minimum required. Better scores get better rates.
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Lower debt-to-income ratios – Lenders want to see you can manage the renovation loan payments.
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More cash reserves – Expect to have 6-12+ months of mortgage payments in reserves.
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Experience with renovations – First-time homebuyers likely won’t qualify. The lender wants to see experience managing projects.
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Documented scope of renovations – Lenders will review and approve your detailed renovation plans.
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Uses experienced contractors – Lenders want licensed, bonded, and insured contractors.
What Properties Are Eligible?
Non-owner occupied renovation loans work best on relatively small residential properties:
- Single family homes
- Condos
- 1-4 unit multi-family properties
Vacation rentals or commercial properties generally don’t qualify. The property should be zoned residential.
How Much Can You Borrow?
These loans are based on the after-improved value of the property, not the purchase price. The after-improved value must be validated by an appraisal.
Typical loan-to-value ratios range from 75-85%, allowing the investor to leverage the equity that will be created through renovations.
For a property purchased for $200,000 that will be worth $300,000 after $50,000 in renovations, the renovation loan could be up to $255,000 (85% of $300,000).
How Long Is The Renovation Period?
A typical renovation period is 3-9 months, depending on the extent of the planned renovations. Investors must complete all planned improvements within this timeframe.
During the renovation phase, the loan is interest-only, meaning you only pay the interest and not principal. This keeps payments low during the construction.
Do I Need Experience With Renovations?
Lenders will want to see you have successfully taken on renovation projects before. They will ask about your renovation experience and ability to manage contractors.
If you don’t have renovation experience, consider starting with a smaller project first to gain experience before applying for a non-owner occupied renovation loan.
What About The Renovation Budget?
The lender will review the proposed renovations, timelines, and budgets. Be realistic and detailed. Remember renovations almost always go over budget.
To limit risk, lenders hold back 10-20% of the renovation funds until the work is complete. They want evidence the work is done well before releasing the final funds.
How Can I Get Started?
If you’re interested in a non-owner occupied renovation loan, the first step is connecting with an experienced renovation loan officer. They can review your current finances, discuss renovation plans, and help you submit a complete loan application.
Be prepared to provide property information, construction plans, a detailed budget, and information about your team. It’s smart to have contractors bid early.
The loan officer can walk you through all requirements so there are no surprises during the approval process. They can also help you find the most competitive renovation loan rates and terms.
The Bottom Line
A non-owner occupied renovation loan lets real estate investors finance the purchase and renovation of an investment property with a single loan. If you’re looking to add value through renovations, this can be a powerful loan product. Just be aware it comes with stricter requirements and oversight compared to conventional financing. Connect with an experienced mortgage professional to be sure it’s the right fit.
See What You Qualify For
When a lender is considering a borrowerâs application, the distinction between a non-owner-occupied and an owner-occupied mortgage will come into play. Mortgage lenders use this property classification to determine the interest rate for the loan.
If a borrower is looking for a non-owner-occupied mortgage, the lender will likely charge a higher interest rate. This is the case because non-owner-occupied properties are at a higher risk of default. With that, the lender compensates for this increased risk with a higher interest rate.
Beyond the interest rate, a lender may also require a larger down payment for a non-owner-occupied mortgage. The increased down payment is another way for the lender to protect itself from the higher risk associated with non-owner-occupied mortgages.
Be Aware Of Occupancy Fraud
As you start to explore your non-owner-occupancy mortgage options, youâll quickly find that the costs are significantly higher than an owner-occupied mortgage.
Unfortunately, this can lead some investors into occupancy fraud in an effort to cut costs. Instead of being truthful on the application, the sneaky investor lies and claims they will live in the property even if they have no intention to do so.
If you lie about your intentions on a mortgage application, youâre committing occupancy fraud. However, if your circumstances change after youâve closed on the mortgage, then youâre in the clear.
For example, letâs say you close on a home you intend to live in today. But tomorrow your employer transfers you to another state. At that point, you could move and rent out the property without committing fraud. The important thing is to be completely honest when completing your mortgage application.
If you are caught lying about your occupancy intentions, you could face serious repercussions. You could be forced to repay the entire mortgage immediately or be prosecuted for bank fraud. Definitely things you want to avoid!
FIXER UPPPER – FHA 203K Rehab Loan | LESSONS LEARNED
FAQ
What is a non owner occupant loan?
Does a 203k loan have to be owner-occupied?
What is the best loan for rehabbing houses?
Does a HELOC have to be owner-occupied?
What is a non-owner-occupied renovation loan?
A non-owner-occupied renovation loan is a little bit different from a tradition non-owner-occupied loan. Instead of simply using the funds to purchase a property, you can use the funds from a non-owner-occupied renovation loan to purchase the property and cover renovation costs. As a real estate investor, this may sound like a great opportunity.
What is a non-owner occupied mortgage for a rental property?
In theory, a mortgage for a rental property, also called a non-owner-occupied loan, isn’t that different from a mortgage for a primary residence. But non-owner-occupied loans can have higher mortgage rates, shorter loan terms and higher down payment requirements.
Can I get a renovation home loan for an owner-occupied property?
One of the beauties of non-owner renovation loans is that they’re based not on the current value of the property, but on what the value of the property is after the renovations are completed. Many buyers know it’s possible to get a renovation home loan for an owner-occupied property.
What financing options are available for non-owner occupied properties?
For investors looking to renovate non-owner-occupied properties, specialized financing options are available. Non-owner-occupied renovation loans provide the flexibility to acquire and improve properties, with the loan amount based on the property’s post-renovation value. Why higher interest rates for non-owner-occupied properties?