Real estate investors who regularly invest in rental properties know first-hand that lenders require more down payment and interest rates are higher for rental properties compared to financing a primary residence. How much more and how much higher?

Down payments for rentals are a minimum 20how does a lender know if its a rental percent of the sales price and if you put down an additional 5.00 percent you can get a slightly better rate. Mortgage rates for rental properties can average anywhere from .125 to.375 percent higher and while that doesn’t seem like very much at first glance, depending upon how much you borrow it can mean a lot in monthly savings, increasing your cash flow. But there’s a question some borrowers ask, “How do lenders know if the property I’m buying is a rental property? Why don’t they automatically give me the rate for a primary residence?”

Lenders set rates based upon perceived risk and actuarial data. Non-owner occupied homes will go into a foreclosure long before a borrower’s primary residence. Borrowers need a place to live and rental properties will be let go first. That’s why lenders ask for more equity upfront and hike the rate. But again, how do lenders know a borrower’s intentions? First, they simply ask.

The loan application has a field asking if the property is to be used for a primary residence, a second/vacation home or an investment property. If it’s an investment property, the borrowers will check that box. But the lender also uses its own internal litmus test. Does the purchase make sense? Do the borrowers currently live in a home that is larger than the one they’re buying? Lenders will accept someone downsizing near retirement age but may not for someone in their first or second home. Sometimes a lender will ask for an occupancy affidavit where the borrowers state they intend to live in the property they’re buying and renting out the current one or otherwise eventually selling it.

After the loan has closed and the lender is still not convinced, they send an inspector to the new property, knock on the door and find out who lives there. If it’s the tenants and not the owners, the lender can accelerate the loan with a solid case of loan fraud pending. That’s a felony in multiple circles. Trying to convince a lender a home is going to be owner-occupied when it’s not is too great of a risk.