Rates have not changed much in recent weeks, and borrowers refinancing are still a noticeable portion of many lender’s business. Borrowers have to contend with the usual underwriting process for credit, have an appraisal done, and qualify for the mortgage. But one somewhat surprising issue that some lenders and borrowers are encountering, that often halts a refinance, is a remodel!
Lenders are having borrowers, who are almost through the process, tell them that not only has there been some remodeling done, but it is still going. Remodeling done without a permit is a problem (it changes the value of the home, but is often illegal), and remodeling in process can take months while waiting for the required building permit.
These events will often hold up the refinance. On the face of it, the lender should not be concerned about improvements in the property that increase its value, since that makes the loan a safer investment. But in fact the lender is concerned that in the process of making an “improvement”, the owner may have violated local building codes, which could make the property unsalable in the future. This danger is greatest when the owner does the work himself and doesn’t want to be bothered with (or doesn’t know about) the local building codes.
If a loan officer asks about improvements, it is because he or she is following the instructions of the underwriter, who wants to make sure that work on the house has been done legally and is in compliance with building codes. The underwriter will want this verified by the local government entity that enforces the codes.
Any borrower refinancing while having improvements in process may be asked by the loan officer to come back after they have been completed and document that they are in compliance with the codes. Generally speaking, borrowers should not refinance and remodel at the same time.
Over the decades, mortgage companies have found that non-owner occupied (i.e., rentals, or second homes) are riskier than owner occupied homes: people need a roof over their heads, but not necessarily that 2nd home in the mountains. So the rate or price will be worse for a non-owner loan.
But what happens when a borrower has an owner-occupied loan and decides to rent it out later – does he or she need an entirely new loan? When you sign loan documents for your primary residence there is a certification of occupancy form whereby you affirm that the property will be your primary residence. It includes language regarding loan fraud, loan may be called due and payable, etc., if you affirm your intention to occupy and do not occupy the property. The key is the “intent to occupy.”
But circumstances change, as do housing needs. If you have lived in your home for several years then you have fulfilled the intent to occupy the home and yes, you can move out of your home at a later time and use it as a rental/income property and you do not need to obtain a new non-owner occupied loan.
If you are refinancing your current residence and fully intend to purchase a new home in the near term future then it is strongly advised that your refinance be with a non-owner occupied loan. Some borrowers make the mistake of finding another home when they’re in the middle of refinancing the first home as an owner-occupied home! Obviously lenders cannot have two owner occupied loans going simultaneously, or one on top of the other, with the same client-obviously one is an investment property and must be declared as such. The only exception to this would be if it is evident and a case can be made the new home will be a second or vacation home.
To sum things up: must you live in your home for the duration of your owner-occupied mortgage? No. Must you intend and fulfill the intent to live in your home with an owner-occupied mortgage? Yes. But for how long? There is no exact answer to that question, as it may come down to your ability to argue your intent and/or show a change of circumstance, but plan on at least several months.
As the jumbo loan and refinance market begins to pick up, it’s important to remind consumers of important tips to ensure their credit is and remains in good standing before applying for a mortgage – and what to do if they are turned down for a mortgage.
In general, lenders have more flexibility when qualifying borrowers for a jumbo loan ($417,000 in most areas and $625,000 in some high-priced areas) since mortgages below that threshold must meet stricter standards for conventional loans. Borrowers who are denied a mortgage because they do not meet qualifications must be sent an “adverse action notice” or a statement of credit denial providing the denial reason, which is typically sent within 48 hours after verbal notification.
In 2013, jumbo and conforming loans had 14.5% of all home-purchase loan applications and 22.7% of refinance applications denied compared to 18.7% of home-purchase loans and 39.6% of refinances denied in 2007. The main reasons for a mortgage denial include credit history, high debt-to-income ratio, a reflection of the borrower’s income relative to monthly payment amounts, and insufficient reserves. During the home buying process, borrowers should be made aware that a mortgage denial does not turn up on their credit report, only a credit inquiry, which accounts for 10% of their score.
Another important tip for the consumer is to avoid opening any new credit cards or a car loan as this can raise their debt-to-income ratio for 90 days before applying for a mortgage. Limiting deductions can also help maintain a lower debt to income ratio, as self-employed borrowers may want to limit deductions on the past two years of tax returns to indicate higher annual income. Jumbo borrowers with either a bankruptcy or foreclosure will also need to wait to apply for a mortgage for 4 to 10 years depending on the lender, even if their financial situation has improved.
As always, communication is critical – borrowers need to spend time with a trained loan officer finding out the process and answering the “what if’s”!
Borrowers who misrepresent their intended use of the property they are financing are a major concern for lenders. Occupancy fraud is one of the mortgage industry's biggest challenges, and loan agents are well versed in the repercussions, and work on educating our clients about the importance of correctly reporting occupancy.
But from a lender’s point of view, what is the difference between an owner occupied home and a non-owner occupied home? The mortgage industry assigns pricing and mandates specific underwriting guidelines based on perceived risk. Properties that are not going to be occupied by the borrower are referred to as investment properties and are more likely to go into default than owner-occupied homes.
Mortgages on homes that will be occupied by the borrower as their principal residence are least likely to go into default and foreclosure. This is because a borrower facing tough times is more likely to walk away from a rental property than the home he and his family lives in. The third category of occupancy is the vacation home. Mortgages for these properties are given rates comparable to those on owner-occupied homes but their location must make sense as a vacation home.
To compensate for the increased risk of foreclosure, rates for mortgages on investment properties, also called non-owner occupied properties, are higher (roughly .375%) than for loans on owner occupied homes. In addition, non-owner occupied loans require a higher down payment – usually a minimum of 20%. Since most borrowers want the lowest rate with the least amount of down payment possible, it has proved tempting for some homebuyers to state that they are going to live in the home even though they have no intent on doing so. It is best for all parties involved to be open about the occupancy of the property, and your agent will work with you on the best financing possible.
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