Owner Occupied Status Affects Mortgage Refinancing

Added October 9, 2008 by Ilyce R. Glink

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Summary: A renter asks about an owner-occupied requirement with regard to mortgage refinancing. The renter says his landlord has refinanced the property twice, each time claiming he lives there. The renter wonders if the landlord breaks the law by claiming the property is owner-occupied during a mortgage refinance. Circumstances may change after the mortgage refinance occurs and that lenders don't have time to follow up.

Q: I have been renting a house for seven years. The owner has refinanced the house two times as owner occupied. Is this against the law? Thank you.

A: When you fill out a mortgage application, the lender asks you if this is going to be an owner-occupied property. If you answer "Yes," you are telling the lender that you intend to move into the property and live there as your primary residence. If you answer "No," then you are signaling that this will be either a second home or an investment property.

Owner-occupied properties can get financing at a lower interest rate than investment properties, which typically are charged not only a higher interest rate but additional points and fees. At least some of the millions of investors who bought investment property over the past few years attempted to save money by claiming that the homes they were buying were going to be owner-occupied -- even though they knew they weren't going to live there.

You're supposed to fill out the application truthfully. Any time you put anything down on a mortgage application that isn't true, you may be committing fraud against the lender.

Mortgage Refinancing Circumstances Change

However, even if you indicate that the property is going to be an owner-occupied property, plans can change. Just because you get an owner-occupied mortgage doesn't mean you cannot move into that home and later rent it out. It just means that when you close you are supposed to move into that home and treat it as your primary residence thereafter. You are usually required to move into the home within 30 to 60 days of the settlement or closing date.

It would seem that if the owner lives in part of the property and you rent out part of the property, then he would be entitled to refinance the property with an owner-occupied loan. If you have lived there for 7 years and the owner doesn't live on the property or in another floor of a 2- to 4-unit building, then perhaps not.

I wonder how you know that the owner has been refinancing and under what circumstances and how you know that he told the lender that he was obtaining financing by claiming the property was owner-occupied. Still, if the owner has been paying his mortgage on-time and in full each month, most lenders won't care since they have so much else on their plates at the moment.

Finally, if your question is whether the owner of the property broke any laws in claiming that the property is owner-occupied when he knew it was not, that question would depend on the documents signed by the borrower, the laws in the state in which the property and the owner are located, and the banking and mortgage laws enacted by the United States. But in the end, that legal issue would best be answered by an attorney that deals with the enforcement of legal contracts and fraud issues.

Published: Oct 9, 2008

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