Our client wants to refinance (no new money), a purchase money loan where the proceeds were used to purchase a Non-Owner occupied rental property. She does not reside there for more than 14 days in a calendar year (Reg.Z,226.3(a)(3). The loan originally closed as a business purpose loan. The underwriter feels that because the client does not want to sell the property to a real estate developer and although the Borrower is currently renting the property, she is reporting sporadic income on Schedule E so the loan transaction should be personal purpose. I disagree.. HELP!!!

If the property is currently being rented what is the loan officer's reaosoning for this being a consumer purposes refinaning?

The underwriter refers to the factors in section 226.3(a)(2).. *The borrower's primary occupation bears little relationship to the purpose of the loan
*The borrower will have little management involvement in the item purchased or the activity that is financed with the loan proceeds

I advised them that it doesn't matter that the Sch.E shows a loss, to the fact that the property is Non-Owner Occupied Rental property is an investment..

Your underwriter needs to understand that RENTAL property (as opposed to INVESTMENT (sale) property) is an automatic business purpose loan. It's quite clear in the regulation.

Thanks!!!

Look at 3(a)3

http://www.bankersonline.com/regs/226/suppi226-3.html

Remember that the Commentary has the full force and effect as the Reg itself.

And let me qualify my response a bit better as I was strictly basing it on the facts given that this was a refinance of original purchase money for a rental property.

Let's take this one step further, given that the rental exemption only applies to acquire, maintain or improve the property. If that same borrower pledged rental property as collateral for a loan for personal purposes (to buy a car, educate a child, etc), the exemption wouldn't apply.