HMDA Loan Purpose Chart: Codes, Hierarchy, and Common Errors

The Home Mortgage Disclosure Act loan purpose codes are the five values Regulation C requires you to assign to every reportable application or loan on the Loan Application Register: Home Purchase (Code 1), Home Improvement (Code 2), Refinancing (Code 31), Cash-Out Refinancing (Code 32), and Other Purpose (Code 4), plus a sixth code, Not Applicable (Code 5), reserved for narrow situations.¹ The classification drives how the rest of the LAR entry reads, and purpose-code errors are among the most common issues examiners flag.²

The Hierarchy for Multi-Purpose Loans

Most classification questions come from loans that could plausibly fit two codes. Regulation C resolves those overlaps with a fixed priority order, and once you internalize it the rest of the coding decisions get easier.³

Home purchase beats everything. If a loan qualifies as a home purchase and also as a refinancing or home improvement, report it as a home purchase.
Refinancing beats home improvement. If a loan is both a home improvement and a refinancing (or cash-out refinancing) but not a home purchase, report the refinancing code.
Refinancing beats other purposes. A refinancing that also finances something else, like educational expenses, is still a refinancing.
Home improvement is the residual dwelling-purpose code. Use it when a loan is a home improvement and something else, but not a home purchase or refinancing.

Purchase first, then refinancing, then improvement, then other. When a higher-priority code fits, use it.

Home Purchase (Code 1)

A loan is a home purchase when its proceeds go, in whole or in part, toward buying a dwelling.⁴ The classification still applies when the borrower already owns the property (a land-contract buyout, for example) or when the loan is secured by both the dwelling and non-dwelling real property such as farmland that includes a residence.

Construction and Bridge Loans

Construction financing is where most institutions get tripped up. A standalone construction loan designed to be replaced by separate permanent financing is excluded from HMDA reporting entirely as temporary financing.⁵ Bridge and swing loans that will be paid off from the sale of an existing home and refinancing into permanent financing follow the same rule.

Two construction-related products do get reported as home purchases. A combined construction-to-permanent loan (one loan that finances construction and then automatically converts to permanent financing) is not temporary, because it was never designed to be replaced by a separate loan.⁶ And the separate permanent loan that later replaces a construction-only loan for the same borrower is itself a home purchase loan. A construction-only loan extended so a builder can construct a dwelling for sale is excluded as temporary financing, even if it will not be replaced by separate permanent financing for that borrower.

Loan Assumptions

When your institution enters a written agreement putting a new borrower on an existing mortgage in order to finance that borrower’s purchase of the dwelling securing the loan, the assumption is a home purchase. Timing decides this one: if the new borrower takes title first and then assumes the loan, the purpose is no longer to finance a purchase, and a different code applies.⁷

Home Improvement (Code 2)

Code 2 covers loans whose proceeds go toward repairing, remodeling, or improving a dwelling or the land it sits on.⁴ A detail worth flagging: a home improvement loan does not have to be secured by the dwelling to be reportable. An unsecured personal loan made specifically for home improvement can still be a covered loan.

Improvements should be physically connected to, or permanently benefit, the property. A new roof, an addition, a swimming pool. Routine upkeep and movable personal property like furniture or appliances do not qualify. And if the same loan also satisfies and replaces an existing dwelling-secured obligation, the refinancing code takes priority under the hierarchy above.

Mixed-Use Properties

A building used for both residential and commercial purposes is a dwelling if its primary use is residential. You have flexibility in how you make that determination: square footage, income generated, or unit count are all acceptable, and you can pick the standard on a case-by-case basis.⁷ If the property qualifies as a dwelling under whichever standard you apply, a loan to improve the residential portion is reportable as home improvement.

Refinancing and Cash-Out Refinancing (Codes 31 and 32)

Regulation C defines a refinancing precisely: a new, dwelling-secured debt obligation that satisfies and replaces an existing, dwelling-secured debt obligation by the same borrower.⁴ Every element counts. Both obligations must be secured by a dwelling. The old one must actually be satisfied and replaced. And the borrower must be the same person or entity on both.

A loan that pays off an existing mortgage along with credit card balances still qualifies, because a dwelling-secured obligation was satisfied and replaced. A new dwelling-secured loan that only pays off unsecured debt, or a loan secured by something other than a dwelling, is not a refinancing and instead falls under Code 4.⁸

Refinancing Versus Modification

A transaction that renews or modifies the terms of an existing obligation without satisfying and replacing it is not a refinancing for HMDA purposes and is generally not reportable.⁹ The test is whether, under the parties’ contract and applicable law, the original debt was actually extinguished and replaced with a new one. If the original note survives in modified form, you have a modification, not a refinancing. Whether the original lien was released does not affect this analysis.

Choosing Between Code 31 and Code 32

Once a loan qualifies as a refinancing, you have to decide between standard refinancing (Code 31) and cash-out refinancing (Code 32). There is no universal dollar threshold. The decision hinges on your own institution’s underwriting: if you (or an investor whose guidelines you followed) treated the transaction as a cash-out refinancing when processing the application or setting the rate and fees, report Code 32.¹⁰

If your institution does not distinguish between cash-out and non-cash-out refinancings, applying the same terms regardless of how much cash the borrower takes at closing, report every refinancing as Code 31. Two institutions can classify the same borrower transaction differently and both be correct, because the code reflects internal pricing treatment rather than a fixed cash-out threshold.

Other Purpose (Code 4)

Code 4 is the catch-all for covered dwelling-secured loans that do not fit any of the first three categories. Typical examples are dwelling-secured loans taken out primarily for educational expenses, medical bills, or debt consolidation where no prior dwelling-secured lien is satisfied and replaced.¹

Business-Purpose Loans

The business-purpose rules are narrower than many lenders assume. A dwelling-secured loan made primarily for a business or commercial purpose is excluded from HMDA reporting unless it qualifies as a home purchase, home improvement, or refinancing.⁷ That exception pulls in more than it might appear. A loan to a corporation to buy a rental property is a home purchase. A loan to renovate a daycare located in a dwelling is home improvement. A refinancing of a multifamily investment property mortgage is a refinancing. All three are reportable despite being primarily commercial.

A business-purpose loan that falls outside those three categories, such as a dwelling-secured line of credit used as working capital with no purchase, improvement, or refinancing involved, is excluded entirely. It does not get reported under Code 4.

Reverse Mortgages

Reverse mortgages that meet the general criteria for a covered loan are reportable and still require a purpose classification using the same five codes as any other covered loan. They are flagged separately on the LAR through a reverse-mortgage data point.⁷ A reverse mortgage that satisfies and replaces an existing dwelling-secured obligation is a refinancing. One that does not replace any existing debt is typically coded as Other Purpose. Reverse mortgages are specifically excluded from the preapproval reporting requirement for home purchase loans.

Not Applicable (Code 5)

Code 5 is rarely used for originated loans. Its primary application is purchased covered loans where the origination took place before January 1, 2018.¹ For virtually every originated application or loan, one of the other four codes applies.

What Counts as a Dwelling

Because every purpose code turns on whether a dwelling is involved, the definition is worth knowing. Regulation C defines a dwelling as any residential structure, whether or not attached to real property.⁴ That includes detached homes, individual condominium and cooperative units, manufactured and other factory-built homes, and multifamily residential structures or communities.¹¹

The “whether or not attached to real property” language pulls manufactured homes into HMDA coverage even when they sit on leased land, so a loan to buy a manufactured home on a rented lot is a home purchase requiring a purpose code. Entire apartment buildings are dwellings too, which is why loans to buy or refinance rental properties are often reportable.

Common Purpose-Coding Errors

Certain mistakes come up again and again in examinations:

Miscoding debt consolidation loans as refinancings when no existing dwelling-secured lien was actually replaced.
Classifying construction-only loans as home purchases when they should be excluded as temporary financing.
Failing to apply the multi-purpose hierarchy, most often by coding a purchase-plus-improvement loan as home improvement instead of home purchase, or a refinance-plus-improvement loan as home improvement instead of refinancing.
Treating a modification as a refinancing when the original note was not satisfied and replaced.

The CFPB has brought enforcement actions targeting HMDA data quality and found that institutions in those cases lacked procedures reasonably designed to prevent the errors.¹² A second review step, where someone other than the person who entered the data checks purpose codes against the loan file, catches most of these before submission.

1
Consumer Financial Protection Bureau. Reportable HMDA Data: A Regulatory and Reporting Overview Reference Chart
2
eCFR. 12 CFR 1003.4 – Compilation of Reportable Data
3
eCFR. 12 CFR Part 1003 – Home Mortgage Disclosure (Regulation C)
4
eCFR. 12 CFR 1003.2 – Definitions
5
eCFR. 12 CFR Part 1003 – Home Mortgage Disclosure (Regulation C) – Section 1003.3(c)(3)
6
eCFR. 12 CFR Part 1003 – Home Mortgage Disclosure (Regulation C) – Supplement I, Paragraph 2(j)-3
7
FFIEC. A Guide to HMDA Reporting: Getting It Right!
8
eCFR. Supplement I to Part 1003 – Official Interpretations – Section 2(p)-3
9
eCFR. Supplement I to Part 1003 – Official Interpretations – Section 2(p)-1
10
eCFR. 12 CFR Part 1003 – Home Mortgage Disclosure (Regulation C) – Supplement I, Section 4(a)(3)
11
Consumer Financial Protection Bureau. 12 CFR 1003.2 Definitions
12
Bureau of Consumer Financial Protection. Consent Order Freedom Mortgage Corporation