What Is the Occupancy Clause in a Mortgage?

When obtaining a reverse mortgage, there are various clauses that you’ll have to read through and understand so you can avoid breaking them. One of those clauses is the occupancy clause, which requires you to occupy your property and make it your primary residence. You can still leave the property to go on vacation, visit your grandchildren, or receive medical care. However, you may be required to notify the lender about extended absences from the home. 

Key takeaways

  • The mortgage occupancy clause requires you to make your home your primary residence. 
  • Occupancy statements are there to protect the value of the home and the lender from losing money.
  • If you lie about your property being owner-occupied, you’ll be committing mortgage fraud.
  • You’ll have to contact your mortgage company to remove the occupancy clause. 

Why do mortgage companies verify occupancy?

Mortgage companies will verify occupancy because mortgage fraud is a fairly common practice for those looking to avoid the high interest rates of investment properties. Moreover, occupancy can affect the appraised value of the property. For instance, vacation homes may be harder to maintain because they’re not being lived in, or if you don’t have good tenants, your rental may sustain costly damages. Both of these examples can lead to underwater mortgages and even foreclosure, which is a significant loss for the lender. 

How does the occupancy clause work?

For home loan applications, you’ll be asked to provide details about what you intend to do with your property. For example, if you’re planning on renting out your home or if it’s going to be used as a vacation property, you’re required to mention that. This is important if you wish to qualify for a reverse mortgage.

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What happens if you violate the occupancy clause?

Mortgage companies have ways of finding out if you lied about using the property as your primary residence. This includes looking at the type of homeowner’s insurance you have and if additional rental insurance policies are purchased for your address. If a mortgage company finds out you didn’t follow the occupancy clause on purpose, it’s considered mortgage fraud. 

This may lead to your mortgage being revoked and having to pay the entire loan immediately. If you’re unable to pay this, it could result in the lender triggering a foreclosure. A mortgage company can also alert the government of suspicious activity pertaining to multiple occupancy clause violations, making it challenging to refinance or secure funding for a property in the future.

To prevent this, reverse mortgages require you to attend a reverse mortgage counseling session to ensure you understand your loan responsibilities. Plus, it’s also an opportunity for senior homeowners to discuss reverse mortgages with a professional without worrying about biases or vested interests. 

Can you get out of the owner occupancy clause?

If you decide later on that you no longer want to occupy your current home, you’ll need to contact your mortgage company. Ultimately, it’ll be the mortgage company that decides whether or not you can convert your home to a rental property. If they don’t approve your request, you may have to refinance your loan. You can also take a look at the details of your loan to find out when the mortgage occupancy clause expires. Note that to be eligible for a reverse mortgage, you cannot use the property as a rental or part-time vacation home. 

This is just one of the clauses found in a reverse mortgage loan. Read more about the reverse mortgage guidelines and rules on our blog. 

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