If want your loan application approved, understand it will need to pass a “reasonable man’s test.” Here is what you need to know about mortgages if you work far away from the home.
Home lenders go to great lengths to represent and warrant they have met all credit criteria set forth by Fannie Mae and Freddie Mac. If it’s discovered after the sold loan is sold, the originating lender had a material oversight in the creation of the loan, the lender may be forced to buyback that loan. A buyback is an incredibly costly liability to a mortgage company’s bottom line. This why underwriting is necessary and documenting everything is paramount.
Occupancy is an integral component of any home mortgage loan. The least risky mortgage loan type is an owner occupied home. Second homes and vacation homes follow, with investment properties being the most risky type of financing. The lender assumes if the borrower somehow came into dire financial straits they would be more likely to walk away from an investment property than the roof over their head. For this reason, lenders charge more, in some cases, considerably more as byproduct of the borrower’s credit score, down payment and loan size.
Mortgage underwriters (the decision makers on approvals) thoroughly review each mortgage application questioning “is this loan scenario plausible? Mortgage underwriters are incredibly sharp. They are specifically trained to mitigate risk for a mortgage company i.e. document, question, and leave no stone unturned. Part of their examining and questioning of your mortgage loan package is the proximity to your home in relationship to where your job is.
For example it’s not going to make sense you are buying a primary home if you work two hours away from where you live leaving you to commute four hours per day five days per week. Such a scenario would be difficult for an underwriter to believe without some other additional layer of support detailing the unique circumstance. Maybe in this type of scenario you have the ability to telecommute were you only work at a location further from your home a few days per week with the subsequent days working from home? Perhaps your job description letter from your human resources department could explain the nature of your occupation and that how important traveling is to your job and what percentage of traveling your job requires? This is type of documentation mortgage companies crave. If job proximity is an unexplained factor on your loan, then an underwriter could change your transaction to an investment property. This would come at a cost of higher rates fees and a subsequently higher monthly payment even if your intention is to live in the home.
Mortgage Tip: Your explanation and any supporting documentation should support the believability of your loan scenario.
Generally speaking, an hour commute from where you work to where you will be living is acceptable. Anything beyond an hour commute will open up questions, prompting the need for detailed explanations and more paperwork.
Be clear with your intentions upfront with your mortgage company about what it is you’re trying to accomplish. Alternatively, in some cases, it might be better to structure the home as a second home especially if you live in one property the majority of the week and an alternative home on the weekends for example. What you have to reveal within your proposed scenario will dictate the loan structure.
When Would It Be Considered A Primary Residence?
As long as the scenario can be justified on paper, documented and explained, and if your true intention is to live in the home, it is a primary residence transaction and would be considered as such on your loan application. The further and more unique your scenario is, the more documentation will be required to specifically support to the naked eye, the home you are financing is truly in fact a primary residence, despite proximity questions. Following things would be needed to document such a scenario:
- letter of explanation
- job description specifically identifying travel time requirement
- documentation supporting the commute time
- offer letter from new employer stating job acceptance if relocating
When Considered A Second Home?
This could be a factor if the property is over an hour away and the property you are buying is in a resort type area. Resort type areas and/or resort type communities for example typically pass the reasonable man’s test the underwriter performs when analyzing the location of your job in relationship to the home in which you are financing. If you’re financing a second home, you’ll need at least 10% equity.
When Considered An Investment Property?
This is the most dreaded scenario consumer’s face. Loan is sent to underwriting as a primary home or second home, something in the file with the location does not jive with the believability of the transaction, underwriter counters the loan to an investment property which requires 20% down. It would not make sense if the property you are planning to buy is right down the street as secondary residence, it’s an investment property. The home would have to in a reasonable commute time from the primary home e.g. up to an hour away for the loan to hold water as secondary residence. If the property is a vacation rental for example, it could be a tough nut to crack if you plan to finance the home as second home, especially if tax returns identify the property as a rental. Tax returns hold all the cards in residential mortgage lending. As far as proximity to your home, an investment property has no limitation; it could be a few miles away or hundreds of miles away.
If your loan has any outside of the box type structure to it, work with the loan officer who has gained empirical knowledge of underwriting, which can only be acquired through years of experience.