We've made 2 loans to same Borrower. Loan to purchase a new primary residence is secured by the home being purchased with occupancy code 1. A separate loan closed the same day was made for the down payment on the new home, but this loan is secured by the Borrower's existing home. This separate loan has a short term but it will be paid in full with proceeds from sale of the existing home. Should we use occupancy code 3 for this short term loan?

What is happening to the existing home? Second home, renting it?

They are selling the existing home and will use proceeds to pay off the loan for down payment.

I don't think code 3 is appropriate, would it not be 2?

a. For purchased loans, use Code 1 unless the loan documents or application indicate that the property will not be owner-occupied as a principal residence.

b. Use Code 2 for second homes or vacation homes, as well as for rental properties.

c. Use Code 3 if the property to which the loan relates is a multifamily dwelling; is not located in an MSA; or is located in an MSA or an MD in which your institution has neither a home nor a branch office. Alternatively, at your institution's option, you may report the actual occupancy status, using Code 1 or 2 as applicable.

Code 2 does make sense. We are having a bit of a disagreement because we've been advised to use Code 3 for this particular scenario. Thanks for sharing your opinion.

I think those are the old definitions for occupancy. Code 2 is now just for second homes. Code 3 is labeled investment, but it's defined essentially as not 1 or 2. "For purposes of § 1003.4(a)(6), a property is an investment property if the borrower does not, or the applicant will not, occupy the property."

I think both would be code 1 if they're currently living at one house and will be living at the other house they are buying. Would be different if they have already moved out.

Principal residence. Section 1003.4(a)(6) requires a financial institution to identify whether the property to which the covered loan or application relates is or will be used as a residence that the applicant or borrower physically occupies and uses, or will occupy and use, as his or her principal residence. For purposes of § 1003.4(a)(6), an applicant or borrower can have only one principal residence at a time. Thus, a vacation or other second home would not be a principal residence. However, if an applicant or borrower buys or builds a new dwelling that will become the applicant's or borrower's principal residence within a year or upon the completion of construction, the new dwelling is considered the principal residence for purposes of applying this definition to a particular transaction.

Oh IR - you are absolutely correct. Sorry for the wrong citation.