Have you ever received a bill that was higher than you anticipated, and when you looked it over you found that there were one or more “additional fees” you were unaware of? It can happen with housing, too.
Among all the specialized terminology relating to real estate and mortgage financing, the definitions of owner-occupied and non-owner-occupied seem pretty straightforward. However, many people don’t realize right away that the occupancy type of a home can dramatically change the financial aspects of financing and owning property much like getting a bill for more than you expected. Depending on how much wiggle room you have in your budget, unexpected extras could put a damper on things. By educating yourself ahead of time, you can prepare yourself and avoid unpleasant surprises.
Rent-to-own: Non-owner-occupied and owner-occupied options
You need to understand which category each falls under when it comes to rent-to-own financings like a lease option or contract for deed. . As previously stated, the definitions of occupation status are fairly simple and straightforward. A non-owner-occupied home is one that the owner is not the owner’s primary residence or lives in. An owner-occupied home is one where it is the homeowner’s primary residence. So, what does a lease option or a contract for deed fall under?
A lease option is a landlord-tenant relationship until the purchase of the home is complete. A property is non-owner-occupied in a lease-to-own. A contract for deed is a sale at the inception of the agreement. It is similar to a bank mortgage, putting it into the owner-occupied category. These are important distinctions when it comes to financing, insurance, and property taxes.
Financing
Before a lender determines the interest rate to charge, they know if the property will be owner-occupied or not. Loans for a non-owner-occupied property are charged at higher rates because they are considered higher risk. Therefore, higher risk equals a higher interest rate.
If you are considering a lease option, the owner of the property is likely to be paying a higher interest rate if they are paying a mortgage. The interest rate cost is wrapped in your monthly payment. Lease options include a timeframe for when the borrower is required to purchase the home with a bank loan. When you apply for a bank mortgage you will borrow as owner-occupied if you plan on continuing to live in it and not use it as a rental or secondary property.
Deed Agreement
Under a contract for deed agreement, also called a land contract, you generally receive many of the rights of homeownership. You have equitable interest, tax write-offs (property taxes, interest, etc), and documentation that is filed at the county. Be careful to ensure the existing owner makes all of their underlying mortgage payments to ensure a higher lien does not impact your agreement. Just as with the lease-option, when you are in a better position to apply for a bank loan, you will be able to do so as owner-occupied and should be able to get a lower rate.
Anyone looking to purchase a property as a secondary residence or an investment property to rent out, including via Airbnb, should expect to pay that higher rate.
Insurance
Just as with bank loans and financing, the insurance industry also relies heavily on benefits and risk analysis. Repairs are made in a more timely fashion before more damage can occur, and more security measures are often in place. Because of this, homeowner’s insurance rates are also higher for non-owner-occupied homes.
For those purchasing a home through a lease option, you are not yet the owner, so you will need to purchase renters insurance while the property owner purchases rental insurance. Since a contract for deed is similar to a bank mortgage, just minus a bank, you will normally be required to purchase homeowners insurance. You will want to discuss options with your insurance company, if you will be living in the home, it is generally considered owner-occupied. Funds for insurance and property taxes are required to be placed in escrow like it would if it were a mortgage through a bank.
Property taxes
Under a lease option, the renter is not responsible for paying the property taxes directly but, as with any of the other costs, it is generally included in the monthly payments. The terms change a little here and non-owner-occupied properties fall under the non-homestead designation which is taxed at a higher rate.
While laws may vary from state to state, those purchasing through a contract for deed generally gain all the benefits—and the responsibilities—of homeownership. When the property being purchased is being lived in by the purchaser, the property will fall under the homestead designation and taxed at a lower rate. Be sure to verify the laws for the state in which the property is located.
Occupancy fraud
Because of the difference in risk factors and rates, lenders, insurance companies, and tax assessors take these designations very seriously. When a borrower lies about who will be living in the home, it is called occupancy fraud. That definitely costs more than anyone expects. It’s important to follow the laws.
Can a home be both owner-occupied and a rental?
As a matter of fact, yes. However, you will want to verify specifics with your lender, insurance agent, and tax assessor’s office to make sure you are properly following any policies or laws.
Single-family homes
With a single-family home, it is possible to be the owner-occupier while renting out a portion of it as long as you live in the main area. For example, you can rent out a room or basement apartment as long as you are occupying the bulk of the home yourself. You can even rent parts of the land for use as well.
Multi-family real estate
Multi-family dwellings like duplexes are even easier to determine. The property owner can live on one side and renting out the other so that the property is owner-occupied. In fact, this is a great way to take advantage of investment benefits and cost savings. It is often called “house hacking“.
Benefits of rent-to-own
Now that you know how occupancy type can affect the costs of homeownership and how it relates to rent-to-own options, you can plan ahead to make better decisions. If you are tired of renting but aren’t quite able to get a bank loan, or you’ve already been denied, a rent-to-own option might just be your bridge to homeownership. Lease options and contract for deeds offer more advantages than renting while giving you time to get you financially secure. If you want to know how to find rent-to-own options read.
Private money lenders for owner-occupied properties
Adam Zach and Jon Enright are the creators of Home Equity Partner and provide a variety of custom housing options to future homeowners through a unique renting option. Home Equity Partner developed a new tool that allows you to pick any home listed for sale and live in it. We specialize in rent-to-own and seek to help individuals and families gain homeownership to live the American Dream.
Home Equity Partner works with people who don’t qualify for a bank loan but make a good income and down payment.
Home Equity Partner creates a 1–5 year bridge by raising capital to purchase homes. It allows buyers to have many of the benefits of homeownership, while they work to obtain a bank loan.
Resources
Home Equity Partner Flow Chart
This interactive Mind Map is the perfect tool to help you identify the best financing path for your situation. Start with “Have You Tried to Get a Bank Loan?” Follow your answers to land on 1 of 4 options.
The Pre-Approved Podcast
Becoming a Homeowner When The Bank Says No. 1 in 10 homeowners denied each year by the banks. We will discuss Rent-to-Own, Lease Options, Contract for Deed, Qualifying Mortgages, Non-QM Loans, and Private Mortgages.
Home Equity Partner Blog Posts
Rental vs lease option vs contract for deed: While most people are familiar with renting an apartment or home, the terms Lease Option or Contract for Deed can create confusion. Read more to understand the key differences and what’s best for you.
What you need to know about rent-to-own: The key benefits of rent-to-own LINKhttps://homeequitypartner.com/application/
Saving a down payment for your lease to own: Saving money for the deposit doesn’t have to be hard.
Selecting a real estate agent: If you are looking for a lease-to-own home and are not sure where to begin, a high-quality realtor should be your starting point. LINK https://homeequitypartner.com/
Don’t just take our word for it. Listen to the people we have already helped!
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