Question: My wife and I have been looking to purchase our second investment property. We stumbled across a home that we would love to buy as our primary residence. Our plan was to refinance our current home to a 30-year fixed-rate mortgage (we currently have a 15-year fixed rate) to lower our monthly payment. This would enable us to rent out the house with a positive cash flow and buy the new one. Our lender told me that our rate would be higher because the property will eventually be held as a rental. Since we will be living in the property throughout the refinance process, why wouldn't we be able to obtain a rate for owner occupants?

Answer: Your lender is giving you good advice and preventing you from committing loan fraud. On page four of the Standard Uniform Mortgage Application, there is a question that requires an answer. The question is, "Do you intend to occupy the property as your primary residence?"

Obviously, the answer is "No." Even though you would be living in the property up until loan closing, the key is that your intent is to move out and rent the house shortly after settlement of the refinance.

I remember many years ago I had a customer who tried to convince me that one of his properties should be considered owner occupied. Apparently the house was vacant because a tenant had moved out and he was having some cosmetic improvements made before the house went back on the rental market.

So this guy tells me that he is sleeping on the floor in the vacant house while the improvements are being made. Such a move, he said, satisfied the owner occupancy requirement. His wife, in the meantime, remained living in their current residence located in a more affluent neighborhood across town.

Come on -- give me a break. Some people go to great lengths to cheat the system in order to save a half percentage.

Let's determine what would qualify as "owner occupied." Many lenders require that the borrower sign an "Owner Occupancy Affidavit" at loan settlement. The language in the form can vary from lender to lender, but the basic message is that the person who signs the form is acknowledging that there is no preexisting plan to vacate the property. This is something that you obviously could not truthfully execute.

Where do you draw the line? Surely a homeowner can't truthfully warrant that he will use the property as his primary residence forever. As long as you don't have specific intent on vacating the property at a predetermined time, you can truthfully sign an Owner Occupancy Affidavit. For example, let's say you decide to take advantage of today's low rates and refinance your house. At the same time, you and your wife are keeping an eye out in case a property comes up that you love. This could take a few months. In fact, you might realize that remaining in your current residence is the best thing. But if your dream home pops up on the market a few months after your refinance settlement, I don't think anyone's going to question your motives. In fact, I've never heard of any lenders actually verifying occupancy after closing.

The bottom line is that making loans secured against rental property carries a higher risk, and therefore carries a higher interest rate. Lenders don't want to make loans on investment properties unless the property is disclosed as an investment property. Seeking a mortgage for a primary residence when you know the property is not or will not be your primary residence is a form of loan fraud. Don't go there.

Published: February 26, 2004

Use of this article without permission is a violation of federal copyright laws.

, the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.