Two Unit House Owner Occupied Mortgage

I am buying a two-unit house and will live in one unit and rent out the other. I was told by my lender that the mortgage rate for this type of housing is higher than single family house. But a friend of mine said it is “owner occupied two-unit” and should be treated like single family mortgage. Which one is correct?

5 Answers

Believe it or not, both are correct; it depends on the type of financing you will be getting.

For an FHA loan, a 2 unit is priced the same as a single family home.  The advantage with a 2 unit property is that you are able to use the rent collected on the 2nd unit to help in qualifying for the loan.  In this case your friend is right.

Foa conventional loan that is sold to Fannie Mae or Freddie Mac, there is a hit to pricing which will normally raise your rate about 0.25 - 0.50%.  In this case your lender is correct.

What you want to do is compare the products available to you and pick the best one.

Your lender may not be familiar with the Federal Housing Administration loan.  Known more commonly as FHA, the program makes no distinction between a 1 or 2 family home as long as it is going to be a primary residence.  With a down payment as low as 3.5% of the selling price, FHA also can consider 75% of the rental income from the other unit in qualifying.  In some areas that percentage is even higher.  Your lender is correct about 'add-ons' for conventional loans for PMI rates among other things.  But your friend is correct if the FHA program is used.

In fact, FHA can be used for up to a 4 unit dwelling if the property will be used as a primary residence.  3 months reserves for payments/taxes/insurance/MIP, though.  And the property should cash flow on its own.  Those are the 2 main differences.  Mortgage Insurance is required on all FHA loans unless there is a 10% down payment and the term is 15 years or less.  An Up Front MIP premium which is usually financed is always required.

Your friend is correct. This is an ongoing problem within our industry......Predatory Lending!! As long as you will be taking occupancy of one of the units this should be considered 1 loan on your primary residence.

With that being said there is a stipulation to this which is that both units need to be titled together as one property on the legal description and they need to be grouped together on the county tax rolls.

At times you will find that individual sides of a duplex are titled separately and have been previously been sold separately to different people with different loans and, as such, have separate legal descriptions and separate tax ID numbers.

Check with the title company and see if the legal description combines the 2 units into 1 legal description. It should say something like "1101-1103 Adams Street or something to that effect.

If the legal description combines the 2 units it's time to find another lender. There is no such guideline in our industry that makes rates higher for a 2 unit home. The only factor that would make your rate higher is your broker telling you a lie and you falling for it. I commend you for checking on what he/she is saying. Everyone should!

If the legal descriptions are separate, you will need to purchase both properties separately, have 2 down payments, 2 sets of closing costs and pre-paid expenses, 2 loans and 1 of the loans will be considered an investment property which means you would need a larger down payment, possibly higher credit scores and a higher interest rate but only on that 1 unit.  

The rate is not higher on a 2-unit.  It will price out as "Owner-Occupied" and be priced just like a single-family residence.  I'd like to excuse his knowledge and dismiss it as a fool opening his mouth when he doesn't know the facts (he should've just said "I don't know, but lemme check".  Maybe he's new...

Your friend is definitely correct and should join my team of LO's! lol 

The ONLY way it would price higher is if you don't live in it.  Then the bank would price it as "Non-owner" occupied, which, obviously would pose a higher risk scenario for your lender. 

According to exhibit 19 the loan level pricing adjustmentfor a 2 unit whether it is owner occupied or not is .50% add on to the yield.  This may or may not affect your interest rate depending upon how much the lender needs/wants to yield in yield spread premium.  If it is non-owner occupied you have that hit as well which is huge 1.75%-3.00% depending upon ltv. 

Regardless if it is owner occupied or not Freddie/Fannie have a loan level pricing adjustment for it being a 2 unit so it is not priced the same as a single family home.  You can access the exhibit 19 directly from Freddie Mac or Fannie Mae.