April 30, 2010, Newsletter Issue #216: Owner Occupied Property vs. Investment Property

Tip of the Week

Owner-occupied (O/O) mortgage loans have the lowest interest rates available in the market. Lenders are well aware that a borrower will take all measures to protect the property he/she lives in. The owner’s “attachment” to the property is just as emotional as it is financial. This reality is reflected in the lower interest rate. You will pay about one to one and one-half per cent higher for an investment (non owner-occupied) (NOO) property.

Qualifying for a NOO is a bit different also. Theoretically, everyone can qualify for a NOO mortgage since the mortgage payment (principal, interest, taxes, and insurance) (PITI) is totally covered by the rental income you will receive. Therefore, your personal debt-to-income (DTI) ratio should not be changed. In fact, if you earn a good deal more than your PITI monthly obligation, your DTI will be improved.

Fair market value (FMV) will be based, not merely on the recent selling prices of similar homes in your area, but also on the income stream generated by a NOO property. Mortgage lenders assume (sometimes incorrectly) that you are purchasing investment for long-term income and appreciation (not a quick resale in a few months). Therefore, the monthly income stream and the historical vacancy factors are important in estimating the true FMV of an investment property.

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