What “Occupying It Part of the Year” Actually Means

Written by Bryan Piccolomini, NMLS #228509, a mortgage loan originator with Residential Mortgage, LLC (NMLS #167729), a wholly owned subsidiary of Northrim Bank. Loans are originated through Residential Mortgage, LLC.

What the standard actually says

Fannie Mae's Selling Guide sets out what a second home has to be. In its words, the property:

• “must be occupied by the borrower for some portion of the year”
• “is restricted to one-unit dwellings”
• “must be suitable for year-round occupancy”
• “the borrower must have exclusive control over the property”
• “must not be rental property or a timeshare arrangement”
• “cannot be subject to any agreements that give a management firm control over the occupancy”
• “must be underwritten in DU and receive an Approve/Eligible recommendation”

Notice what is absent. There is no stated number of nights, no minimum weeks, no percentage of the year. People look for that figure and it is not there. The requirement is expressed as occupancy for some portion of the year combined with exclusive control, and the second half carries most of the weight.

Source: Fannie Mae Selling Guide B2-1.1-01, Occupancy Types.

Exclusive control is the real test

Exclusive control means you decide who uses the property and when. You are not working around someone else's booking calendar, and no management company holds the keys to that decision.

That is why the same section rules out arrangements giving a management firm control over occupancy. Two properties can be used for an identical number of nights a year and land on opposite sides of this line, purely on the basis of who controls the calendar. If you are looking at a resort development, the project review guide covers how rental programs interact with this.

Renting it out, precisely

This is the most common question and it has a precise answer. Fannie Mae's Selling Guide says a loan is eligible for delivery as a second home where the lender identifies rental income from the property, as long as the income is not used for qualifying purposes, provided all other second home requirements are met, including the occupancy requirement.

So occasional rental does not automatically convert a second home into an investment property. What it cannot do is (a) breach exclusive control, or (b) be needed to make your numbers work. If the rental income is what makes the purchase affordable, that is a different loan, and the classification guide covers where the line sits.

The obligation does not end at closing

This is the part rarely written down anywhere. Occupancy is not a box ticked at application. It is a representation about how you will use the property going forward, and lenders and servicers can and do look at whether the representation held.

Signals that can prompt a question later include a mailing address that never matches the property, insurance written on a policy type that does not correspond to how the loan was made, or a listing that shows the property advertised for extended rental. None of those are accusations by themselves. They are simply the sort of thing that invites a look.

The reason it is worth taking seriously is the document you signed. The industry standard application is the Uniform Residential Loan Application, published jointly by Fannie Mae and Freddie Mac as Form 1003 and Form 65, and mandatory in its redesigned form for applications taken on or after March 1, 2021. Under 18 U.S.C. 1014, knowingly making a false statement for the purpose of influencing the action of a federally regulated financial institution carries a maximum fine of $1,000,000 and up to 30 years imprisonment.

That is not the likely outcome of a change in circumstances, and it is not intended to alarm anybody. It is the reason a careful originator asks direct questions early, and the reason the right moment to describe your plan accurately is at the beginning.

Sources: Fannie Mae, Uniform Residential Loan Application (Form 1003), 18 U.S.C. 1014, Cornell Legal Information Institute.

When your plans genuinely change

Circumstances move. A job relocates, a family situation changes, a property that was meant for weekends becomes something else. Changing your mind is not fraud. Misrepresenting your intention at the outset is a different thing entirely.

If your use of a property has genuinely changed since you financed it, that is a conversation to have rather than a thing to leave alone. There are recognized routes for property that has become a rental, and for refinancing a second home under its current classification, covered in the refinancing guide.

A short checklist

• Can you say honestly that you will use the property yourself during the year?
• Do you control who uses it and when, without a management arrangement in the way?
• Is it usable year round, including access?
• Do your numbers work without counting rental income?

Four yes answers and you are describing a second home. Any no is worth raising in the first conversation, when it is still easy to structure the file correctly.

Common questions