Property use is a process that is often utilized in the evaluation of commercial and residential mortgages, in terms of qualifying the property for a mortgage based on how the lender classifies the property. In many instances, this classification will impact the amount of the mortgage loan as well as the rate of interest that is applied. This is because determining property use is important to the process of assessing the degree of risk that the lender will assume if the mortgage is granted, making it easier to extend terms that help to keep that risk within and acceptable range.
When it comes to residential mortgages, property use often requires classifying the property in one of three categories. The designation of primary residence indicates that the borrower will be using the home as his or her permanent address. If the property is designated as a second home, this means that while the borrower will make use of the property from time to time, he or she will not be living in the property on an ongoing basis. Vacation homes are an example of property that may be classified in this category.
The third class used in defining property use is known as non-owner occupied or investment property. This would include properties that are purchased as a means of generating income by leasing or renting the property. Rental homes such as single dwellings or duplexes are two examples of investment property that would fall into this classification.
Each of these designations implies a different level of risk for lenders. For example, if the property use is determined to be a primary residence, the risk for the lender is considered to be relatively low. This can result in the extension of interest rates and terms that are lower, assuming that the borrower has a solid credit rating. In contrast, if the property use is determined to be investment or non-owner occupied property, the risk assumed by the lender is considered greater, resulting in the possibility of higher interest rates and additional provisions within the body of the loan contract.
Defining property use is also important in terms of assessing the amount of the loan itself. Depending on the intended purpose for the property, the lender may approve a higher amount. For example, if the investment property is located in a rapidly growing area of the community and there is every reason to believe that the units will soon be filled and generating enough revenue to cover the monthly mortgage payment and properly maintain the property, the lender may be willing to approve the loan for closer to the current market value, making it possible for the borrower to submit a lower down payment.