Did you know that there is a way to have the financial benefits of owning a second property while still having it considered “owner occupied?” It can be done if the house is lived in by your parents or a disabled child. Call it loophole or whatever you want, but it is an ownership strategy that can work as a win-win for everyone involved.
What Does “Owner Occupied” Mean?
Typically, a property must be owner occupied when you get a mortgage loan backed by Fannie Mae or Freddie Mac (an FHA loan would be the most common example). That means the borrower must live in the home they are getting the mortgage for. Borrowers like these loans because they offer favorable interest rates and require low down payments. Owner occupied homes also offer favorable tax benefits because any income from a second property being rented out would be considered taxable income by the IRS.
However, if you buy the property for either your parents or a disabled child to live in, it will still be considered owner occupied in the eyes of Fannie Mae and Freddie Mac. What is considered a “disabled child” you ask? Here’s how they define it:
“Parents (or a legal guardian) wanting to provide housing for their physically handicapped or developmentally disabled adult child is permissible if the child is unable to work or does not have enough sufficient income to qualify for a mortgage on his or her own. The parent is considered the owner/occupant.”
Who Benefits From This Rule?
Most commonly, this strategy is used to buy a second home and rent it out to these family members. It allows the borrower to get better loan rates and terms while still gaining equity on a second property. It is also a major advantage when the borrower chooses to refinance a home that is still considered owner occupied. In addition, any rental income generated from the parent or child tenants can be used to help qualify for better refinancing terms.
As an investment property, you will be the owner. This allows you to continue gaining equity and other tax benefits of real estate ownership.
It is important to note that any rental income may be still subject to income taxes, but the advantages far outweigh that one potential drawback. Let’s review the advantages of using this unique “owner occupied” rule:
- Lower mortgage rates
- Lower necessary down payment
- No reserves required like some second homes/investment properties
- Rental income can be used to qualify for refinance
- Tax benefits of real estate ownership
Making the Right Mortgage Decisions
If you are thinking about buying a second home or refinancing an investment property you may already own—especially if you have a parent or children already living there—you will want to understand this rule and use it to your financial advantage. It’s a way to own multiple properties while getting the same mortgage benefits as as a single “owner occupied” homeowner.
To learn more about buying a home, qualifying for a mortgage or refinancing a current home loan under this rule, contact Transparent Mortgage today at (619) 701-3906. We’ll help you explore all your options and make the right mortgage decisions.