How does the lender assess the risk associated with a loan according to the Occupancy Affidavit?

The correct response highlights that the lender assesses risk associated with a loan by considering the type of property being financed. The Occupancy Affidavit serves as a confirmation of how the borrower intends to use the property, whether as a primary residence, secondary home, or investment property. This classification is crucial for the lender because different uses imply different levels of risk. For instance, a primary residence typically carries less risk compared to an investment property, as it is assumed that homeowners are more motivated to maintain and stay current on payments for a place they occupy.

Lenders use these classifications to evaluate the potential for default based on the property type, which directly impacts underwriting decisions and loan terms. Certain properties, like single-family homes as opposed to multi-units or commercial properties, may have different risk assessments. Thus, understanding the type of property helps lenders determine how effectively to manage the risks involved when granting loans.