Refinancing Guidelines

by John
(Albertville, Minnesota USA)

Ask Kate about Refinancing Guidelines & Occupancy Certification: Great site Super Kate! I'm working on a refinance to take cash out of a 2nd home to combine with some money to pay off the HELOC on my first home.

John continues... I am being asked to sign an Occupancy Certification where I must state under penalty of federal law whether the 2nd home is to be considered a Primary Residence, Second Home, or an Investment Property.

My mother-in-law lives in the second home and my wife and I use it for visiting friends and family on Holidays and vacation. There is no written rental contract with my mother-in-law, but she does pay me money monthly for repairs and up keep on the home, but not enough for me to profit from the activity (i.e. this doesn't cover the current mortgage payment).

Should the home be considered a second home or an investment property?

What is the significance to the lender between these designations?

Kate Answers: Refinancing Guidelines & Occupancy Certification

Hi John, Super Kate here!

Life isn't scripted in absolutes but when it comes to occupancy certification (owner-occupied, 2nd home, aka vacation home, or investment property), you can depend on black and white with few exceptions.

On top of that, lenders are not shy about checking up on occupancy status after funding. So my advice has always been to toe the line on occupancy certification.

Refinancing Guidelines Confirmed In Recession

Here's why banks are such sticklers regarding occupancy status. Over the years, lender studies show that certain occupancy types are more prone to foreclosure. Sadly, this has been confirmed of late.

Real estate investor loans for multifamily properties are riskiest, falling into delinquency the most often. They are followed by mortgages for single family dwellings that are rented.

Next in the infamous foreclosure line-up are vacation homes also knows as 2nd homes.

Lastly, especially up to 2008 and 2009, mortgages for primary residences were least likely to experience default.

Refinancing Guidelines - LTV

Taking the various levels of risk into account, if your mortgage is underwritten as a personal residence, you have access to the highest loan-to-values, lowest interest rates and closing costs. (LTV is the ratio of loan amount to appraised value.) The higher the loan-to-value, the more you can borrow.

Real estate investor loans have the lowest LTV's, ESPECIALLY when it comes to extracting cash from the equity.

Vacation home loans are sandwiched somewhere in-between personal residence mortgages and real estate investor loans.

Refinancing Guidelines - Rental Income The Deciding Factor

Lenders normally request tax returns to verify a vacation home status. If rental income is declared, most banks will not lend using vacation or 2nd home parameters. The borrower is subject to real estate investor loan guidelines, lower loan amounts, higher interest rates, and inferior mortgage closing costs.

So if you have declared rental income from your mother-in-law on your tax returns, what should you do? You will have to make up your own mind on the route you take but here's what I'd do if I were originating your home loan. Don't ignore the fact and hope it sails through undetected.

I'd enter the transaction drawing attention to the income with a detailed letter of explanation about your arrangement with your wife's mom and how you use the home for vacations.

I believe there may still be some IRS guidelines defining the amount a vacation home can be rented without jeopardizing your tax status. Of course this does not mean lenders are obligated to follow tax laws but you may discover supporting arguments.

Ask your mortgage lender for ideas or assistance.

I have also included more refinance help at the bottom of this page like my Mortgage Checklist to help get your ducks in a row.

John, one more thing. I'd like to hear back from you. Let me know if this page was helpful to you. Comment here on Refinancing Guidelines for Vacation Homes.

Or Ask Kate another question here.

Best wishes,

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