A Guide to Your Mortgage’s Owner-Occupancy Clause

If you’re buying a house with a mortgage, your lender will have a lot of questions for you, and one is what you plan to do with the house you’re buying. But why this question, in particular? It’s because whether you plan to live on the property – otherwise known as owner occupancy – will affect the loan terms your lender sets for you.

An owner-occupancy clause is a specification on a mortgage loan stating that the owner of a house must live on that property for a certain period of time – usually 6 to 12 months. Owner-occupancy clauses allow lenders to verify your intent to use a house as a primary residence.

Let’s dig deeper into what an owner-occupancy clause means for home buyers and sellers, along with how to possibly get out of one and whether this is even possible.

How does an owner-occupancy clause affect home buyers?

An owner-occupancy clause states that a home buyer financing a primary residence must:

• Move into their new home within 60 days of closing
• Live at that residence for at least 6 – 12 months after move-in

It’s important, therefore, that a home buyer factor these requirements into their moving timeline. Owner-occupancy status can affect your interest rate when you can rent out your home and even your property value.

Interest rates

An owner-occupancy clause helps mortgage lenders differentiate between whether the home is a primary residence or an investment property – an important distinction when issuing a loan and establishing an interest rate.

Since interest rates are typically higher for an investment property, an owner-occupancy clause prevents borrowers from securing a lower rate for a primary residence and immediately renting it out – a plan that would be considered mortgage fraud.

Rental limitations

If an owner wants to within the first year after moving in, they’ll need to ask their lender for approval. If your lender doesn’t approve using your real estate as a rental, you may have to refinance your mortgage. If you know from the outset that you’re looking to rent out your house, let your lender know right away during the mortgage application process.

Remember that home buyers can often secure a better mortgage rate for a primary residence, so they need to carefully consider their plans for the property before applying for financing. You may find that the perks of a lower interest rate outweigh your desire to immediately rent out the house.

If earning rental income is nonnegotiable for you, you might consider buying a multifamily home, living on that property and renting out the remaining units. This would allow you to generate rental income while reaping the benefits of the more favorable loan terms that come with a primary residence.

Property value

Owner occupancy could affect a property’s appraised value, which is an important piece of the mortgage process that lenders consider.

How does an owner-occupancy clause affect selling a house?

Oftentimes, an owner-occupancy clause prohibits homeowners from selling their home within the designated 6 – 12 month period. If you attempt to sell within the time frame that your mortgage’s occupancy clause prohibits selling, you may commit mortgage fraud.

Before taking any concrete steps, reach out to your lender to see if there’s a way to sell during the period of time when this isn’t supposed to be allowed. If selling isn’t an option, refinancing to a different type of home loan may make it possible.

What happens if you violate an owner-occupancy clause?

If you violate a mortgage’s owner-occupancy clause, it’s considered mortgage fraud and your lender might penalize you with fees or change the terms of your loan – likely to a higher interest rate.

In worst-case scenarios, a lender will request repayment of your mortgage in full. If you can’t afford to pay back the entire loan amount, the foreclosure process will begin, and you could lose your home. This may also make it harder to get approved for future financing.

How mortgage lenders verify owner occupancy

Mortgage lenders check in to make sure homeowners are abiding by the owner-occupancy clause. Lenders might take notice of several indicators that suggest the possibility of owner-occupancy fraud. These include:

• A change in mailing address differing from the home address on the mortgage
• The type of insurance policy the homeowner takes out being inconsistent with the type of property they purchased
• The homeowner’s tenants taking out renter’s insurance using their home’s address
• Property tax rates in the home’s neighborhood signaling that the property is being rented out
• The homeowner having a long history of buying and selling homes

How to get out of an owner-occupancy clause

Unforeseen circumstances sometimes pop up, where a job change or another life event forces you to relocate only a couple months into your occupancy clause. Perhaps you need to move, and selling your house isn’t in the cards – which leaves renting out the property as your only real option.

Lenders know this can happen, and if it does, they require communication – and some will want documentation. For example, they might need a note from your employer stating your circumstances and verifying or explaining your career change.

If you’re not approved, your lender might require you to refinance, or you may have to let your owner-occupancy clause run its course before moving.

The bottom line

A mortgage’s owner-occupancy clause helps lenders protect themselves from fraud. Be clear in the application process about your intentions with your new property – whether it’s a primary residence, an owner-occupied property or a rental unit – and maintain open communication with your lender throughout the occupancy period.

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