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Borrower Beware: Limits on Number of Owner-Occupied Loans

The combination of low, long-term interest rates and significantly moderated housing prices seems to be generating a strong demand for borrowers looking to trade up and buy into a larger or better home. Of this group, I am seeing an increasing number, enticed perhaps by a strong rental market, looking to retain their current home as an investment property. For those following this course of action, it is important to note that borrowers are limited through most financing channels to only one property with an "owner-occupied" loan secured within a 12-month period. If the current home was recently financed in this preferred category, or if you are considering a cash-out refinance for down payment funds on the new purchase, your financing on the new home may be compromised. 

Owner-occupied homes fall into the lowest risk category of all properties and therefore enjoy preferred mortgage pricing and other beneficial considerations such as higher loan-to-value ratios for lower down payments. Investors know that borrowers are far more likely to walk out on their obligations to a rental property than on their primary residence. For this reason they are universally more liberal with the terms they offer on owner-occupied properties -and evermore careful at verifying a subject property's intended use. By the time a borrower has signed their loan documents they have reaffirmed the subject property's designated use numerous times. For owner-occupied homes, the deed of trust will typically state the borrower's agreement to occupy the property for at least 2 years. While extenuating circumstance such as a change of job location or a growing family would permit an allowance from the originally designated use, any effort that could be construed as a premeditated attempt to secure owner-occupied financing on an investment property would be considered major fraud.

Gone are the days when real estate investors could purchase a property as owner-occupied and then hopscotch a few months later to buy a new "home," only to repeat the process soon thereafter. Fannie Mae has a firm guideline requirement that limits borrowers to just one owner-occupied loan at a time within a 12-month period. Even non-conforming loans that are not sold to Fannie Mae tend to follow the same strictures since investors tend to borrow rather than write their own guidelines. So most jumbo loans would carry this same restriction. If your current home's financing was secured within this period and you are not selling it before buying a new home, you will almost certainly be relegated to investment loan status on the new property. And lenders verify the terms under which mortgages have been secured through numerous means such as MERS (mortgage electronic registration system) or by pulling grant deeds.

If your property was recently refinanced as owner occupied and you want preferred financing on the new home, you could set things straight in the eyes of investors by refinancing your current home again as an investment property. If you need to pull out equity to put toward the down payment on your new home, the same rule applies and, while not "rock bottom, rates are still favorable -especially if the loan-to-value ratio is less than 60 percent and you have a good credit rating. As a potential benefit, you could use rental income on your old home to offset housing expenses and help you qualify for the new purchase mortgage.

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