What Is The Difference Between Owner Occupied and Rental Mortgages?
Basics
Mortgage lenders judge potential new loans on their riskiness.
A borrower with great credit and income is a much lower risk than someone with bad credit. The borrower with lower risk (great credit) will get a lower interest rate and lower monthly payment.
Mortgage lenders also distinguish between properties that are primary residences and properties that are rental properties.
These can be the same type of property (both can be a single family residence, for example). The difference in the two properties is who lives there. In a property that is a primary residence the borrower is actually living in the property - it is their home. A lender knows a borrower is much more likely to be able to make the monthly mortgage payment on their primary residence than on a rental property.
The reason is simple: a rental property is dependent on having paying renters. If the renter is late with their rental payment, or there is a vacancy, the owner of the rental property will be short the cash they need to make a monthly rental property mortgage payment. They will have to use their own personal funds to make the mortgage payment.
This adds additional risk to the loan.
Lenders charge much more for this increased risk. Loans for real estate investors on rental properties are different in two major ways:
- interest rates
- loan guidelines
The lender usually charges a higher interest rate on a rental property. This can be 1% to several percent more than a comparable loan on a similar property for a primary residential borrower.
This translates into a much higher monthly payment for the same loan size.
Loan Guidelines
Mortgage lenders are also generally more restrictive in the loans that do offer on rental properties.
Loans limits may not be as high, credit scores may need to be higher, and a borrower may not lend to higher loan to property value ratios (such as offering 90% financing on rental properties instead of 100% financing).
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