Welcome to the Big Leagues of Borrowing


If any doubts remain that real estate investors and single family rentals have hit the big time, check out a bulletin issued last week by the Office of the Comptroller of the Currency, the agency that regulates all federally chartered banks and thrifts.

Just to make sure that lenders get the message, the OCC served an official notice that the financing of single family rentals (which it calls Investor Owned Residential Rentals, or IORRs) is to be managed with the same risk management policies and procedures used for commercial real estate loans, not residential mortgages.

“Some banks manage IORR loans in a similar manner to owner-occupied one- to four-family residential loans. The credit risk presented by IORR lending, however, is similar to that associated with loans for income-producing commercial real estate (CRE). Because of this similarity, the Office of the Comptroller of the Currency (OCC) expects banks to use the same types of credit risk management practices for IORR lending that are used for CRE lending. This expectation does not change the regulatory capital, regulatory reporting, and Home Owners’ Loan Act (HOLA) requirements for IORR,” said the message to financial institutions.

The bulletin is a shot across the bow and fair warning to lenders and it’s probably not a coincidence that it was issued two months after the OCC was chastised by the Treasury Department’s inspector general  and the GAO for failing to spot widespread problems in the foreclosure practices of major banks between 2008 and 2010.  The agency’s examiners underestimated the mounting risks and were given outdated guidance that did not address how the industry had changed.

Just to be sure it avoids a similar embarrassment with single family rentals, the OCC’s missive lays down the law for benks, but, ot course, the folks who will feel the greatest impact are landlords and investors:

  • Lenders are now responsible for finding out if an owner converts a property from owner-occupied to rental and properties should be segregated from other residential loans so that the bank can effectively manage the risk.  Lenders. must put in place credit risk management policies and processes suitable for the risks specific to IORR lending.  The primary source of repayment for an IORR loan is normally the rental income from the financed property, supported by the borrower’s other personal income. In addition, repayment sources for IORR loans may be volatile and highly leveraged in cases where the borrowers have multiple financed properties. Therefore, lenders will put new policies and processes in place to  cover loan underwriting standards; loan identification and portfolio monitoring expectations; allowance for loan and lease losses(methodologies; and internal risk assessment and rating systems.   Translation:  owners will not be allowed to rent out a mortgaged home.  They will be required to get a commercial loan on terms that will certainly be less favorable.
  • Lending for single family rentals should follow the same regulations and procedures as commercial loans, including supervisory loan-to-value (LTV) limits. “IORR loan policies should establish prudent underwriting standards that are clear, measurable, and within the risk appetite approved by the board of directors.”
  • Amortization for income-producing properties is 15 to 30 years. Further, loan policies should establish underwriting standards pertaining to appropriate owner equity, acceptable appraisal and/or valuation methods, insurance requirements, and ongoing collateral monitoring.
  • Borrowers may finance multiple properties through one or more financial institutions but underwriting standards and the complexity of risk analysis should increase as the number of properties financed for a borrower and related parties increases. When a borrower finances multiple IORR properties, a comprehensive global cash flow analysis of the borrower is generally necessary to properly underwrite and administer the credit relationship. In such cases, bank management should analyze and administer the relationship on a consolidated basis.

The bottom line is small-time investors are going to get calls from their lenders looking for rentals that are still under mortgages.  If they want to keep their financing, they’ll find that they will have to meet very different standards and ratios (and pay higher interest rates), and all investors getting bank financing may find themselves under tighter scrutiny when it comes to the size of their operations and their LTV ratios.

Welcome to the big leagues.

Photo: Brandon Hunt

About Author

Steve Cook is the editor of Real Estate Economy Watch and writes for a several leading outlets in addition to BiggerPockets, including Equifax and Total Mortgage. He also provides communications consulting services to leading real estate companies. Previously he was vice president of public affairs for the National Association of Realtors.


  1. Call me cynical, but this sounds like one thing: higher fees, probably in a combination of origination costs as well as rates. Thought I’m not sure exactly what this entails beyond that. After all, you surely can’t just move out of a home and rent it to someone else without triggering the due-on-sale clause.

    • Please let me know if I am wrong here, but a home owners bundle of rights states that they may do many things when owning a home, one of those is leasing the home…so how in the world would that activate the due on sale clause?

      Coming from a soon to be Certified Residential Appraiser/Realtor/and Investor, this seems to be going against everything that I have ever learned in Real Estate. The homeowner is the Owner of the property and the mortgagor only carries a lien. Therefore, the homeowner has the bundle of rights that can not be taken away. I found these new expectations initially on the OCC website and my only conclusion given the bundle of rights, is that the expectations need to be clarified. It needs to state a threshold such as certain number of properties owned or $ amount of investments that would even be remotely considered to be in the category of IORR. So, one final note to the author and all people responding is that we must first define IORR as the average homeowner that happens to have a few investments surely does not fall into the IORR category. If so, then a direct attack on our God-given property rights are now underway. Also, I agree with Wendy that there are multiple people, and I have multiple clients that have had no choice but to rent their home in order to regain the financial stability. I have clients that have rented their home until they were in a better condition and then moved back into their home a year later. This will just be a gross over reaching of power, but is also what is continuously happened in all factions of all those government agencies in America these days.

      • Wendy, Just to clarify, I was commenting about lenders who make loans knowingly to investors (where it even says so on the mortgage loan docs) can’t come in and penalize the lendee for renting out the property. Not having made loans for private use in over 15 years, I don’t know if the lender has the same rights/restrictions.

  2. There are always those who try to circumvent the system unfairly. Seems like a very strong message is being sent out that it will not be tolerated any more. In the long term this will work itself out for the good of all involved. One problem that doesn’t seem to be being addressed is the bank’s unwillingness to loan the money sitting on their shelves. Getting the money back into circulation keeps things moving more smoothly.

  3. “The bottom line is small-time investors are going to get calls from their lenders looking for rentals that are still under mortgages. If they want to keep their financing, they’ll find that they will have to meet very different standards and ratios (and pay higher interest rates), and all investors getting bank financing may find themselves under tighter scrutiny when it comes to the size of their operations and their LTV ratios.”

    This doesn’t make sense. If you purchase a property under particular terms of financing, that is a contract with the lender. If the lender was aware you were purchasing the property as in investment property, and issued the loan anyway, those lending terms must be legally upheld. I have mortgages for a few rental properties, and I had to put down 30% plus pay higher interest rates for the privilege of borrowing. The lender can’t come in later and change the game after they signed the deal.

    • Hi Wendy,

      Thanks for your comment.

      As I understand it, your lender is doing exactly what the OCC is requiring. Your lender required you to put more down on the propertties you purchased because you do not quality as an owner-occupant of the property. You were charged more not for the privilege of borrowwing but because single family rentals have a different risk profile. You also were give comercial rates, not the lower mortgage rates. The OCC is now cracking the whip to see that all banks do whart yours has done.

      • Steve, that makes sense and reinforces the point I was making. My lender took those circumstances into account in developing my loan terms. My APR is pretty close to owner-occupied SFR rates: 4.75%. But they can’t come in after the loan is closed and change its terms to have it resemble commercial rates.

  4. I really, truly think I’m about to blow a gasket. Especially with that last paragraph. So, are you telling me that, with mortgages I have had for 5-10 years already–mortgages that I obtained totally on the up-and-up, mortgages where the lender was told up front that this will be a rental, not owner-occupied–these lenders will come back to me and pull the plug on my financing if I am not up to these new, crappy standards? Are you kidding me?!?!?!?

    @Dale Osborn, I have never tried to circumvent any financing systems–I’ve always played by lenders’ rules, to my detriment. I already have to give blood, for god’s sake, to get any kind of money out of a bank these days. How on earth are these rules going to help anyone except the banks?

    So, rental properties should be treated like commercial properties? I’m not sure how that makes sense. They function on entirely different levels. Someone’s home should not be thrown together with the Subway restaurant down the street. It’s a whole different ball game.

    It’s already very difficult to get decent long-term financing on rental properties. So here we go again–let’s make it even harder for investors to fund their projects. After all, investors are a huge force in what’s fueling the uptick in real estate sales. Let’s tie their hands a little tighter and see if we can slow things down a little bit.

    Yes, that’s sarcasm. That’s what happens when I’m ticked off big time. Thanks for letting me vent.

    When do these stupid new regulations take effect? If I’ve got some time, I’ve got some borrowing to do before my feet are held to a hotter fire.

    • Terri: You sound like you were up front in making your loans so my comment does not apply to your situation. To clarify it, there are individuals that claim the house will be owner occupied so they can get the owner occupied interest rate. They have no intentions of ever moving into the property. Once financed they then rent it out. They then go looking for another house to use the same tactics on. These types ruin it for other investors and causes changes in lending criteria. Several on this site recommend using the above tactics.
      Hope this clarifies it more for you.


      • Dale, those who use deceptive practices will eventually get caught. They cause harm not only to themselves, but to the innocent folks doing it “the right way”. This is always the case with crime.

        Regarding money sitting on their shelves, banks have to have a significant amount of money in their reserves, by law, to cover the liabilities of the foreclosures they have on their books. I forget the number off the top of my head, but for each foreclosure they are holding, the bank has to have something like 4-7x of that property’s value in cash reserve. With millions of properties in foreclosure, it’s no mystery why banks are holding onto billions in cash reserves.



      • Dale, I’m sorry if I came off kind of testy. I knew you weren’t taking a shot at me. I guess I was a little confused by the way the terms “mortgage” and “commercian loan” were being used in the article. It was as though “mortgage” is only for people who will live in the house, while “commercial loans” are for non-owner occupants. I have a mortgage on a few of my rentals, and they are set up like Wendy discussed–I paid a higher down-payment and higher interest rate because the property will not be occupied by me. So I’ve simmered down a little. Only a little, mind you. 😉

        Bottom line for me is that, I don’t have to worry about this because I never try to pull a fast one on the bank–I’m always honest and up front with everything I do. Now, whether they’ll continue to give me money or not–that’s another thing entirely.

        But I agree with you–those who are lying to the lenders to get the mortgage they want on their rental are making it tougher for legitimate investors.

  5. Some homeowners never intended on turning their property into a rental or lease w/option. They have occupied the property up until the point they can no longer afford to make the payments due to job loss, job relocation, divorce or death of a spouse etc. They are underwater so a traditional sale is not an option. They’ve exhausted loan workout options with the lender (modification, short sale etc) but to no avail. So in trying to avoid foreclosure and keep up on the mortgage they rent the home out. Or, turn the property over to someone competent who will do this for them. (property management). This cadre of borrowers have no desire to be landlords. Will exceptions be made in the underwriting guidelines to determine this? (length of occupancy)

    To make it a requirement the above types of borrowers seek a new commercial loan because of a change in their circumstances just doesn’t seem fair. These homeowners are on the verge of just walking away. So instead, elect to do the responsible thing. Get somebody to pay the mortgage!

    I understand putting guidelines in place to stop borrowers from lying to the bank that never intended on occupying the property to begin with. But to enforce this across the board is impractical. There will be a whole lot more of distressed borrowers left with no option but to foreclose. They are unable to meet their obligations under the current mortgage. Must less qualify for/pursue a new commercial loan.

    Investors who use creative real estate investing strategies in order to help these borrowers will have to rethink things.

    I have over 8 years experience in back end Loss Mitigation (workouts) and Level III Mortgage Underwriting experience. Retail and CLU. My tenure was spread out over 3 different major banking institutions. I humbly state, when this thing is formally rolled out to the banks/servicer. One thing is for certain. The underwriting is subjective (up for interpretation) of the new guidelines/regulation and its application to active mortgages. Translation: Some above board dealing investors, who did things the ethical way the first time around will undoubtedly get caught up in this (soon to be) debacle. Its always that way when banks begin cramming to be in compliance to avoid hefty fines.

    Disclaimer: The above is stated if I understand the implications of the article correctly. Which I believe I do. (smile)

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