Why do most lenders require owner occupancy? - Posted by sdupdike

Posted by phil fernandez on October 02, 2002 at 19:54:06:

Hi Randy,

My guess is also that the government wants to encourage home ownership, therefore they guarantee mortgages ( HUD, VA, Rural Dev etc. ) , with low downpayments.

Why do most lenders require owner occupancy? - Posted by sdupdike

Posted by sdupdike on October 02, 2002 at 14:19:05:

I have read alot about this in past posts. Why would it matter when you go for a loan who occupies the house? (Can you say newbie?)

It just makes sense doesn’t it?? - Posted by Kim (FL)

Posted by Kim (FL) on October 02, 2002 at 22:33:35:

As a mtg broker, I can not believe the amount of people that call me for investment financing when they can’t even handle their own day to day expenses. They have $2 dollars in the bank, can’t pay their $20 minimum payment on their sears card yet they want a loan for $120,000??? I also can’t believe how over leveraged some of the investors I work with are. They have a huge debts for everything they own. Which is not to say that my owner occupant clients are much better but everyone deserves a place to live. That is the American way right? :slight_smile:

Did you know that Fannie Mae changed their lending guidelines for investors this year. You have to qualify for the new debt AND your old debts. Before you could off-set your new debt with a lease but the default rate for NOO has climbed so high that they want to make sure you can truly handle the extra payment. That puts a lot of people out of the fannie mae market, unfortunately. Oh, if you have two years of rental income on your tax returns they will consider you experienced and let you off-set the debt. Makes sense to me as much as I hate the rule (less closings for me)!! :slight_smile:

Lenders have been studying default rates - Posted by David Krulac

Posted by David Krulac on October 02, 2002 at 15:21:51:

for years and have large quantities of data. If your credit score is xxx and you put down xx% there is a 2% chance that you will default. etc. etc. etc. Their stats show that there is a higher default rate for non-owner occupants as there are for o/o. In addition some landlords/owners of multiple properties actually get in financial trouble because they have “too many” properties. and once the dominos start to fall…

David Krulac
Central Pennsylvania

Re: Why do most lenders require owner occupancy? - Posted by phil fernandez

Posted by phil fernandez on October 02, 2002 at 15:08:55:

The lender feels that given a choice of losing your rental property or your own house that you live in, you would stop paying on the rental before your residence. Therefore there is more risk involved in financing a rental property verses your own home. Greater risk. Bigger interest rate for the increased risk.

Easy answer… - Posted by gerald TX

Posted by gerald TX on October 02, 2002 at 14:29:37:

lenders know from past history that terrible problems can arise from tenents in rental properties. Borrowers are much more likely to let a rental property foreclose than a personal roof over their families heads.

This is also why lenders usually want 20% down from investors, plus demand a higher interest rate.

Meant to say NOO, not NOC. Sorry. nt. - Posted by randyOH

Posted by randyOH on October 02, 2002 at 23:30:39:


I would like to see that data - Posted by randyOH

Posted by randyOH on October 02, 2002 at 16:09:18:

Casual observation tells you the default rate is much higher for OO than it is for NOC. I have not collected any data, but from my observation of foreclosures in my area, I would guess it is at least 10 to 1 and possibly 100 to 1.

I agree - Posted by JD

Posted by JD on October 02, 2002 at 23:21:43:

My observations concur with your’s, there are disporportionately more OO foreclosures than NOO foreclosures. Since I used to be a mortgage broker, I know the story about default rates being the primary reason for higher NOO interest rates and fees. I just don’t buy it now. I think it has more to do with social engineering. Don’t forget fannie mae and freddie are regulated by the Feds. It is in the Fed’s best interest to encourage homeownership over rentals.

Randy You’re Wrong - Posted by phil fernandez

Posted by phil fernandez on October 02, 2002 at 17:44:31:

The reason that there are more OO foreclosures is that there are more OO properties out there. It doesn’t mean that the OO default rate is greater. It just means that there are more OO properties to begin with, so of course there will be a bigger number of foreclosures in that group.

I bet if you actually did a study, the ratio would show a larger percent of foreclosures would be in the investor property category than the owner occupied. You have to compare apples with apples.

One big difference is the down money… - Posted by David Krulac

Posted by David Krulac on October 02, 2002 at 17:30:42:

Almost all the bank money around here is 20% minimum down for investors and 3-5% minimum down for o/o.

One FHA lender that I just checked this week was 25% down for investors and they are virtually nothing down for o/o. The o/o must show that they have 3% in the deal which includes application fee, appraisal fee, homeinspection fee, etc. They could have 0% down and have 3% in misc. fees and still qualify.

The lenders are playing the numbers just like life insurance, you live to be 100 and you beat the odds, you live to be 40 and you beat the insurance company.

David Krulac
Central Pennsylvania

However… - Posted by JT-IN

Posted by JT-IN on October 02, 2002 at 17:11:08:


There is always a HOWEVER, when debating statistics… ya know.

Comparing the two stacks of data… Owner Occ and Non Owner Occ, they are apples and oranges. There are many more O/O props, or at least mortgages, than NOO mtgs… so yes, there are lots more o/o Defaults by pure tangible numbers…

What is most relavent is this… if Banks used the criteria for O/O lending, in NOO, then the percentage would be much higher… However, as you are aware, they do no, as illustrated by the standard 20% down payment on income properties…

If the lending standard for O/O properties mirrored that of NOO lending, then the percentages would be neglible to the industry. It is the newer… lower standards for qualifying that have caused the massive numbers to skyrocket in the foreclosure market. Of course there are exceptions, but the norm is that folks losing these houses have very little to loose, as they have little investment… compared to an investor of an income property… in most cases.

Just the way that I view things…


Re: I would like to see that data - Posted by Drew

Posted by Drew on October 02, 2002 at 16:32:10:

Hi Randy,

Your observations are not necessarily contrary to what David stated. The % of folks across the US that own the property that they live in (OO) is about 70% or a little less. The vast majority of the other 30% (NOO) live in multi-unit properties (2 to 1000’s of units).

Therefore, the ratio of OO properties to NOO properties (properties, not units!) might be 20 to 1 or higher. So, if the default rates were identical, you’d see 20 OO foreclosures for every NOO foreclosure. It’s all relative.

On a different note, I always get a kick out bad or meaningless statistics in the news. The one that always gets me is the often quoted 50% of all marriages end in divorce. This is based on annual marriage and divorce filings. So, if there were 100 marriages and 50 divorces, they report that 50% of marriages fail. Sounds pretty good so far…

But what about population? The world population is increasing annually by some percentage, say by 5%. So for every 105 people that are born only 100 people die each year. Can we then conclude that only 95% of us will die? I wouldn’t bet on it.

Just something, other than real estate, to think about.


I’ll take that bet - Posted by randyOH

Posted by randyOH on October 02, 2002 at 19:37:26:

I understand there are more OOs than NOCs. But I will bet you that even allowing for that, the default rate is higher for OOs. Of course, as JT points out below, the lending standards are lower for OOs and that would expain the higher default rate.

But the question that started this whole debate is why are the standards lower for OOs? And I am saying the reason is not because there is less risk in lending to OOs. There is actually more risk. I can assure you that I am more creditworthy than 90% of all OO mortgage applicants. But(for investment property) I will have to pay a higher rate and make a larger downpayment. Why, I do not know for sure, but I assume it has to do with government policies that encourage home ownership. I assume it has to do with the lending standards of Fanny May and Freddie Mack.

Agree. nt. - Posted by randyOH

Posted by randyOH on October 02, 2002 at 19:39:30:


Agree, but… - Posted by randyOH

Posted by randyOH on October 02, 2002 at 19:41:21:

Please see my response to Phil above.