What are non-owner-occupied mortgages and what interest rates do they charge?

Mortgages and loans for investment properties are also known as non-owner-occupied mortgages. They work a little differently from a home loan you might use to buy a residence.

In theory, a mortgage for a rental property, also called a non-owner-occupied loan, isn't that different from a mortgage for a primary residence. But non-owner-occupied loans can have higher mortgage rates, shorter loan terms and higher down payment requirements.

Here, we’ll take a closer look at how non-owner-occupied mortgage loans work, their average mortgage rates and what real estate investors need to know about this mortgage.

What is a non-owner-occupied mortgage?

A non-owner-occupied mortgage, also known as an investment property mortgage or rental mortgage, is a loan meant for residential properties with one – four units. It’s specifically designed for borrowers who don’t intend to live in the property.

In effect, a real estate investor who doesn’t plan on using a property as their primary residence will get a non-owner-occupied mortgage. However, this type of mortgage won’t be a good fit for a real estate investor who wants to purchase a larger property – like an apartment or condo building with multiple units.

Non-owner-occupied mortgage rates

Because these loans are intended for properties owned exclusively for investment purposes, the mortgage rates for non-owner-occupied loans are higher as a result. That’s because non-owner-occupied properties present a higher risk of default in the eyes of financial lenders. In addition, lenders may require borrowers to put down a larger down payment as a safeguard against the increased risks non-owner-occupied properties present.

What’s the difference between residential and commercial loans?

A major difference between residential and commercial loans are the number of units in the property. Commercial lending is typically for investment properties with more than four units, whereas residential lending is more for properties with four or less units.

With residential lending, a borrower doesn’t have to occupy a one-to-four-unit property as a primary residence.

What to expect if you’re applying for a rental property mortgage

Looking to apply for a rental property mortgage on an investment property? It’s important to keep several things in mind.

Higher interest rates

Lenders evaluate mortgages along a spectrum of risk. Non-owner-occupied mortgage rates are higher because of the higher risks associated with these loans. Lenders tend to view non-owner-occupied loans as riskier because it’s assumed that, if the borrower runs into financial hardship, they’ll choose to pay for their primary residence before a rental property.

A borrower’s credit score and credit history can also impact interest rates. Generally, the higher your credit score, the more favorable interest rate you’ll receive. The type of property and number of residences you own may impact your interest rate as well.

Shorter terms

While a home buyer can extend repayment over 30 years, non-owner-occupied mortgage lenders tend to offer shorter loan terms. Rocket Mortgage® can offer borrowers long-term loans for non-owner-occupied mortgages – speak with one of our Home Loan Experts for details.

Higher down payments

Because they’re taking on a significant risk, financial lenders will generally require a 20% – 30% down payment from investment property borrowers wishing to apply for a non-owner-occupied mortgage loan.

Adjustable- or fixed-rate interest rates

There are both fixed-rate mortgages and adjustable-rate mortgages (ARMs) available for non-owner-occupied loans, the latter of which can cost investors much more should interest rates rise significantly. Some real estate investors may lean toward ARMs is they’re not planning on long-term ownership.

Strict credit requirements

Lenders typically require higher credit scores from non-owner-occupied mortgage applicants, at least a 620 FICO^® Score. Additionally, lenders will verify that a borrower has a manageable debt-to-income ratio (DTI) and large cash reserves to cover unforeseen costs or vacancies.

Are there alternatives to non-owner-occupied mortgages?

You can also access alternative financing options beyond non-owner-occupied mortgages if you wish to expand the scope of your real estate investments.

FHA loans

Real estate investors who are considering purchasing owner-occupied multifamily homes of up to 4 units may be able to take advantage of Federal Housing Administration (FHA) multifamily loans. Moreover, once you’ve satisfied the FHA’s 1-year owner-occupancy requirement, you can rent out your unit and move into a new property.

SBA loans

On the other hand, if you already have a demonstrated business record in real estate investing, there are also Small Business Administration (SBA) loans available for landlords who are ready to graduate from real estate side hustle to career real estate investors.

It’s also worth keeping in mind that the SBA loan application process focuses more on an applicant’s business plan and track record than personal credit score and debt-to-income ratio, though these factors are considered as well.

What to expect if you’re applying for a rental property mortgage

Looking to apply for a rental property mortgage on an investment property? It’s important to keep several things in mind. 

Higher interest rates

Lenders evaluate mortgages along a spectrum of risk. Non-owner-occupied mortgage rates are higher because they tend to carry higher risks. For example, if the borrower runs into financial hardship, they’ll likely choose to pay for their primary residence before a rental property.

A borrower’s credit score and credit history can also impact interest rates. Generally, the higher your credit score, the more favorable interest rate you’ll receive. The type of property and number of residences you own may impact your interest rate as well

Shorter terms

While a home buyer can extend repayment over 30 years, non-owner-occupied mortgage lenders tend to offer shorter loan terms. Rocket Mortgage® can offer borrowers long-term loans for non-owner-occupied mortgages – speak with one of our Home Loan Experts for details.

Higher down payments

Because they’re taking on a significant risk, financial lenders will generally require a 20% – 30% down payment from investment property borrowers wishing to apply for a non-owner-occupied mortgage loan.

Adjustable- or fixed-rate interest rates

There are both fixed-rate mortgages and adjustable-rate mortgages (ARMs) available for non-owner-occupied loans, the latter of which can cost investors much more should interest rates rise significantly. Some real estate investors may lean toward ARMs if they’re not planning on long-term ownership.

Strict credit requirements

Lenders typically require higher credit scores from non-owner-occupied mortgage applicants, at least a 620 FICO^® Score. Additionally, lenders will verify that a borrower has a manageable debt-to-income ratio (DTI) and large cash reserves to cover unforeseen costs or vacancies.

Are there alternatives to non-owner-occupied mortgages?

You can also access alternative financing options beyond non-owner-occupied mortgages if you wish to expand the scope of your real estate investments.

FHA loans

Real estate investors who are considering purchasing owner-occupied multifamily homes of up to four units may be able to take advantage of Federal Housing Administration (FHA) multifamily loans. Moreover, once you’ve satisfied the FHA’s 1-year owner-occupancy requirement, you can rent out your unit and move into a new property.

SBA loans

On the other hand, if you already have a demonstrated business record in real estate investing, there are also Small Business Administration (SBA) loans available for landlords who are ready to graduate from real estate side hustle to career real estate investors.

It’s also worth keeping in mind that the SBA loan application process focuses more on an applicant’s business plan and track record than personal credit score and debt-to-income ratio, though these factors are considered as well.

Non-owner-occupied mortgage rates and requirements FAQs

Curious about how non-owner-occupied mortgage rates and loans work and what borrower requirements may be associated with them? We’ve provided answers to several of the most frequently asked questions about these loan programs.

I’d like to refinance my FHA mortgage, but I rent that property out now. What options do I have?

In this circumstance, you’ll need to apply for an FHA Streamline Refinance even though you no longer live in the property.

Can I keep refinancing my investment properties with FHA loans?

The short answer is no. In fact, the FHA will disqualify an applicant from its loan program if it detects a pattern of investment activity, even if the applicant’s other properties weren’t purchased with FHA loans.

What’s the difference between rental, investment and non-owner-occupied mortgages?

Not much. The terms are used interchangeably. The only real difference here relates to the owner-occupancy requirements of your mortgage. Most loan types, including FHA loans, are limited to owner-occupied properties with no more than 4 units.

Can I take out a home equity loan on my rental investment property?

Home equity loans and home equity lines of credit (HELOCs) are only available for owner-occupied properties.

The bottom line: non-owner-occupied mortgages have strict requirements

Non-owner-occupied mortgages often have higher rates, require higher down payments and the approval process is somewhat more demanding. But they can also be helpful tools for real estate investors wishing to acquire rental properties.

Feeling ready to expand your investment portfolio and buy another home? Start the mortgage process today.