An affidavit of occupancy is one of the many documents you see during a real estate closing. Most people don’t realize its significance or the implications for future financial or criminal penalties.
In particular, independent or small real estate investors can find themselves in hot water if they don’t understand the affidavit of occupancy they sign when purchasing residential property for rental income.
What Is an Affidavit of Occupancy?
The affidavit of occupancy goes by other names:
- Statement of occupancy
- Occupancy statement
- Occupancy certification
- Owner occupancy letter
- Residency affidavit
In a nutshell, the document confirms that a financed property will serve as a homeowner's principal residence. The purchaser signs the affidavit promising to occupy the property.
The lender gets the primary benefit of the document because a residence occupied by the owner is more likely to be well-maintained and retain its value. In return for the reduced risk, the lender knocks a few percentage points off the loan.
The purpose of an affidavit of occupancy is to describe the class of property, serve as proof that the property meets all compliance standards and regulations, and meets building codes. Property classes include residential, retail, commercial, industrial, and mixed-use. By classifying a property, the affidavit prevents the property from being used in a way that was not intended.
The affidavit shows the property is fit for occupancy by a residential, commercial, or retail tenant. If a tenant tries to complain about violations at the property, the affidavit of occupancy can be used to determine whether the complaint has merit.
Some affidavits of occupancy require notarization, and most lenders need it to be notarized with jurat. The borrower signs the affidavit swearing or affirming the statement’s truthfulness in the Notary’s presence.
Other affidavits or lenders require an acknowledgment instead of a sworn statement, while others don't require notarization. However, if an individual signs the affidavit of occupancy then makes a false statement, he or she can incur severe penalties, from fines to imprisonment.
What Does Occupancy Mean for a Home Loan?
Different types of properties have different definitions of occupancy.
A primary residence typically requires the owner to occupy the residence for a majority of the year, generally six months or more. The owner may not rent the residence to a tenant when not living there.
A vacation home or second home is defined as an additional property occupied by the owner for a smaller portion of the year. Most are 50 miles or more away from the primary residence, and may not be rented out to tenants while the owner is not living there.
Property used as a rental, whether a single, multi-family, multiple-unit, or condominium home, is considered an investment property. The owner acts as a landlord and may or may not live on the property.
The Benefits of an Affidavit of Occupancy
Mortgage originators and brokers' organizations use an affidavit of occupancy as protection against mortgage fraud. The certificate provides the lender with a transparent chain of evidence to use to expose and prosecute fraud.
The affidavit also brings order to the real estate market by holding small real estate investors accountable for their decisions. It reduces the risk faced by the mortgage lender and may reduce the incidence of non-performing loans on rental properties.
With the affidavit in hand guaranteeing the use of the property, the lender tends to offer lower interest rates for homeowners who purchase a primary residence. As mentioned above, the property is maintained better, with less risk to its resale value.
Who Needs an Affidavit of Occupancy?
Anytime property changes hands, the mortgage lender likely requires one, whether it’s new construction, property conversion or renovation, a change in ownership, or major construction. The document is available through the local government, typically a town or county department of housing or building department.
The affidavit must be requested before any work is performed. The certificate itself won't be issued until the work is complete, and the property has passed all inspection requirements, including plumbing, electrical, fire safety, and general building. If any fines are due, they must be paid as well before the affidavit is provided.
Noncompliance and Failing Inspection
If the property fails an inspection, you receive a list of items to correct to make the property conform to building and safety codes. A time limit, such as 60 days, may limit how long you have to fix everything.
Unfortunately, property owners have an incentive to be dishonest or misleading during the mortgage closing process. It's easy to promise the property is a primary residence before signing only to rent it out directly afterward. Many of these scams are not caught.
These owners are taking advantage of the fact that a home with a signed affidavit of occupancy is favored for lower interest rates from mortgage lenders over property used as a rental. The reduction can be as much as half a percent or more.
That half percent builds to thousands of dollars over the life of a 30-year mortgage.
Unfortunately, if the owner moves out of the primary residence prematurely, and is caught doing so, or if they make other questionable moves, they can face criminal and civil penalties. Affidavits are sworn statements for legal purposes. Anyone breaking the agreement is perpetrating mortgage fraud, which results in high fines and other penalties. They may even face jail time if the court shows wide-spread or large-scale patterns of deception.
In Summary
An affidavit of occupancy is a legal document that, once signed, becomes a sworn statement. Mortgage lenders prefer an affidavit of occupancy and reward signers with lower interest rates. The affidavit also shows the property classification (residential, retail, industrial, or commercial), and serves as proof of use.
An affidavit also guarantees the property has passed all inspections and complies with standards and codes. Not all affidavits require notarization, but whether notarized or not, they are still legally binding on the signer.
Anyone who does not obey the affidavit can be penalized financially or imprisoned for mortgage fraud.
The next time you purchase property, pay close attention to any document labeled affidavit of occupancy or one of its aliases. Once you sign it, you are bound to use the property as specified in the certification.
