In this article, we’ll explain the difference between owner-occupied and non-owner-occupied properties when applying for a mortgage. This information is shared for educational purposes to help you better understand how lenders view each type of property.
An owner-occupied mortgage refers to a home loan where the borrower intends to live in the property as their primary residence. A non-owner-occupied mortgage, by contrast, applies when the property will be used as a rental or investment property, meaning the borrower does not plan to live in the home.
To illustrate how this affects mortgages and their cost, consider a buyer purchasing a home under the same loan amount and general terms. Depending on whether the buyer intends to occupy the property, the financial requirements and outcomes of the mortgage will differ. The following sections outline how those differences typically appear in areas such as interest rates, down payment requirements, and lending guidelines.
| Owner-Occupied | Non-Owner-Occupied | |
|---|---|---|
| Purchase Price | $568,421 | $568,421 |
| Required Down Payment | $27,000 | $135,000 |
| Interest Rate | 6.50% | 7.50% |
| Loan Amount | $540,000 | $426,315 |
| Monthly Payment | $3,413 | $2,980 |
| Total Interest Charge | $688,740 | $646,793 |
Loans for a primary residence (owner-occupied) are considered less risky because borrowers who live in their homes are more likely to stay current on payments. As a result, lenders typically offer lower interest rates, smaller down payment requirements, and more flexible credit standards for these types of mortgages.
In comparison, financing for a second home or an investment property (non-owner-occupied) usually comes with stricter conditions. As shown in the table above, lenders may require significantly larger down payments, higher minimum credit scores, and charge higher interest rates. Loan options can also be more limited, with shorter repayment terms than what is commonly offered for a primary residence.
Interest Rate Differences
On average, non-owner-occupied mortgages carry interest rates about one percent higher than owner-occupied loans. This difference reflects the higher perceived risk to lenders when the borrower is not living in the property.
Down Payment Requirements
The contrast in down payment requirements is often even more dramatic. A typical primary residence may require as little as 5% down, while a non-owner-occupied property can require 25% or more. In practical terms, that means a buyer could need to bring over $100,000 in additional cash to closing on an investment property compared to purchasing the same home as a primary residence.
Lender and Borrower Responsibilities
When completing a mortgage application, both the lender and the borrower have clear responsibilities. The borrower is required to accurately state whether the property will be used as a primary residence or as an investment property. Providing this information truthfully is critical, as occupancy directly impacts loan terms, down payment requirements, and interest rates.
The lender, in turn, has the responsibility to collect this information, review supporting documentation, and ensure the details provided by the borrower are consistent with the intended use of the property. Lenders must verify and evaluate the accuracy of the information, since loan approval and pricing are based in part on the occupancy designation.
Because occupancy status affects the level of financial risk, regulators hold lenders accountable for verifying borrower representations. For that reason, it is highly unlikely that a borrower’s occupancy status would be accepted without documentation. Both parties play an important role: the borrower by making an honest declaration of intent, and the lender by confirming and documenting those details. Together, this process helps ensure transparency, accurate loan terms, and compliance with lending regulations.
The information provided by Homestead Financial Mortgage is for educational purposes only. Products and interest rates are subject to change at any time due to fluctuating market conditions. Actual rates available may vary based on a number of factors, including credit rating, down payment, loan type, and documentation provided. Homestead Financial Mortgage is an Equal Housing Lender.