Written by Pamela Yu, Special Counsel for Compliance and Research
Federal credit unions may offer long-term mortgage loans of up to 40 years to their members. You may wonder if this means that a member can obtain more than one long-term residential mortgage loan from their credit union—say, for the purchase of a second home that they would like to reside in half of the time.
The Federal Credit Union Act (FCU Act) and NCUA’s general lending regulation permit federal credit unions to make first-lien, long-term residential real estate loans with maturities of up to 40 years on a one-to-four-family dwelling “that is or will be the principal residence of the member-borrower.” 12 U.S.C. 1757(5)(A)(i); 12 C.F.R. §701.21(g)(2) (Emphasis added).
It is important to understand that the long-term mortgage authority only applies to a loan to finance the purchase of "the principal residence" of the member-borrower. NCUA has long held that the word "principal" is singular. By definition, there can be no second "principal" home. This means a member can only have one principal residence at a given time. As such, a 40-year long-term loan to finance a member's secondary principal residence is not permissible. See, NCUA Legal Opinion 92-0330.
A federal credit union may, however, make more than one long-term residential mortgage loan to the same member-borrower under certain circumstances. The statute requires that the dwelling "is or will be" the member-borrower's principal residence. NCUA has interpreted this language to mean that a federal credit union may also finance a future principal residence under the long-term mortgage authority. Thus, a member that already has a long-term mortgage loan from the credit union could obtain an additional long-term mortgage loan to purchase a second home if that home is intended to be the future principal residence of the member. See, NCUA Legal Opinion 10-0729. A federal credit union must determine if the "principal residence" requirement is met—that is, the member intends to establish the dwelling as their principal residence in the future—at the time of the loan's origination.
If the proper intent is there when the loan was made, there is no obligation for the member-borrower to make the dwelling their principal residence within any certain timeframe.
In the preamble to the 1983 proposed lending rule, NCUA noted that:
[t]he statutory requirement that the dwelling “is or will be” the principal residence of the member . . . would not require that the member occupy the dwelling within a certain time after the loan is made . . .
See, 48 Fed. Reg. 52475 (Nov. 18, 1983).
Accordingly, so long as the dwelling “will be” or is intended to be the principal residence of the member-borrower at some point in the future, the loan qualifies for the long-term maturity limit.
In addition, NCUA has indicated that a member may allow an individual, including a nonmember, to reside in the future principal residence until such time as the member-borrower occupies the dwelling as their principal residence. The member's future principal residence may also be rented out for income and investment purposes during the interim period without violating the maturity limit rule. See, NCUA Legal Opinion Letter 10-0729.
Federal credit unions offering 40-year long-term principal residence loans should keep in mind that, to qualify for this maturity, the loans must meet additional criteria as set forth in the rule, including specific loan application requirements and compliance with lien and territory requirements, as well as others. In addition, the loan must be secured by a perfected first lien in favor of the credit union on the dwelling (or a perfected first security interest in the case of either a residential cooperative or a leasehold or ground rent estate). Credit unions offering 40-year mortgage loans should ensure they are familiar with the full regulatory requirements regarding long-term mortgages in 12 C.F.R. § 701.21(g).