Non-Owner Occupied Mortgage Loans
A non-owner-occupied or “NOO” mortgage is a loan for a single family residence, duplex and triplex or fourplex, or a condominium or townhome, where the residents are renters; in other words, the property owner does not occupy the property as their personal residence; it is an ‘investment property’ and income producing asset.
The term “non-owner occupied” is not typically used for multi-family rental properties, such as apartment buildings, or in instances where a duplex owner lives in one unit and rents out the other. Someone who takes out a non-owner-occupied mortgage can be used to buy an investment property in Colorado.
In the current real estate world, buying and then renting out properties represents a major portion of the marketplace, and in those instances investors typically will seek out properties that are in disrepair but offer the chance of attracting tenants once they have been renovated and subsequently marketed; this is where a non-owner-occupied mortgage can come into play.
In addition, there are other types of non-owner-occupied loans that can be used both to purchase the property in question, as well as pay to renovate or repair the property for prospective future tenants. Non-owner-occupied mortgages can also be used for different types of properties that are not the primary dwelling of the owner, but are used as vacations residences.
Colorado lenders will take non-owner-occupied status into consideration when determining the interest rate they will charge borrowers, and to make certain that their compensation will be proportionate to the risks they will assume by lending the money. Since non-owner-occupied mortgages tend to have higher-than-average instances of borrowers defaulting on them (a corporation is on the hook), lenders often will charge higher interest rates than they would if the borrower was the occupant of the property in question.
Properly and accurately designating a property with the non-owner occupied classification – which is used in mortgage origination, risk-based pricing, and housing statistics – is important, as occupancy fraud occurs when a borrower lies to a lender by claiming that a property will be owner-occupied – in order to receive a lower interest rate and save money – when in reality it will not.
If a borrower commits occupancy fraud and is found out, they could face many repercussions, including prosecution for bank fraud or a demand from the lender that the entire mortgage balance is reimbursed immediately. However, there are some instances where occupancy fraud could be considered inadvertent, as when the owner of a property had previously resided there but had to move elsewhere for a job. To ensure that you are adhering to the law when seeking to take out a non-owner-occupied mortgage, be sure to contact your lender if the owner is an occupant of your property.
Non-owner occupied properties are required by law to have insurance coverage before tenants are allowed to rent them, and if the property is not being utilized as a rental and purposely does not have tenants, a different type of property insurance will be required.
Aside from the standard non-owner-occupied mortgage, there is also a type of related loan that is used specifically for renovation purposes. A non-owner occupied renovation loan not only allows the borrower access to funds to purchase a property, but also to renovate it as well. In these instances, the property cannot be one that is immediately rented out to tenants, but instead will require renovation first.
The value of non-owner occupied renovation loan is normally based on the value of the property after it has been refurbished and renovated.
Non-owner occupied renovation loans do not have a minimum on the amount of renovation work that is required; however, the renovations are required to increase the value of the property they are being performed on – cosmetic enhancements are not enough – and they need to be a permanent addition to the residence; examples of such include a bathroom, a replaced roof, new plumbing, or a newly-paved driveway.
In Colorado, non-owner occupied renovation loans can usually be used by owners or investors with a varying number of financed non-owner occupied properties.
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