What Is Considered A Second Home
A second home is a property that is purchased in addition to your primary residence in which you intend to live for part of the year. You must live in the second house at least 14 days out of the year, or use the house at least 10% of the days you rent it out. If you plan to get a mortgage on your second home, most lenders will require proof that the property is at least 50 miles aware from your primary residence.
Below are some of the most common examples of second homes.
- Vacation homes
- House you use for work
- Small condominium or apartment when you travel to another state
The house must be a single-unit property and isnt part of any sort of timeshare requirements. Multi-family units are excluded from second homes. The term second home isnt 100% accurate because you can own more than 1 second home.
Its important to know that depending on which lender you chose to finance your second home, they may have strict requirements to qualify your home as a second home. Many lenders wont offer you a mortgage for a second home if you plan to rent it out at all.
What Are The Differences Between A Mortgage On A Primary Residence And A Mortgage On A Second Home
Lenders are a little more cautious on second-home financing, so you may find that making a decent-sized down payment helps seal the deal. It doesnt have to be a huge chunk: 10% should work, in most cases.
Debt-to-income ratio requirements often are a little skinnier, too. Lenders may also look for two months payments in cash reserves or more, depending on your credit profile.
And loan terms may vary a bit, depending on if the second home is a single-family unit, condo or manufactured housing.
How Lenders Define A Primary Residence
A primary residence is the place where you will most likely live and spend most of your time. Primary residence mortgages can be easier to qualify for than other occupancy types and can offer the lowest mortgage rates.
Lenders view them as properties because homeowners are more likely to stay on top of payments for the roofs over their heads.
For the property to qualify as a primary residence, the following criteria must be met:
- You must live in the home for the majority of the year.
- The home must be located within a reasonable distance from your place of employment.
- You must begin living in the house within 60 days of closing.
- If you refinance the mortgage for your primary home, you must be able to prove your residence through documentation .
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How Should You Classify Your Property
Were not tax experts or lending experts, and you should definitely have conversations with qualified professionals before making any big financial decisions.
However, below are some main points that can give you a general idea of which classification might make the most sense for your property.
Financial Advantages of a Second Home
- As we mentioned earlier, mortgage rates tend to be lower for second homes than investment properties.
- Owners of a second home may be able to deduct mortgage interest on their income taxes.
Financial Advantages of an Investment Property
- Owners of an investment property may be able to write off annual losses and depreciation on their taxes.
- Owners of a second home may be able to write off expenses such as repairs, renovations, and marketing costs.
The classification that makes the most sense for your property will depend on how you are going to use it.
As this MoneyCrashers article points out, tax rules are complex and can vary based on other factors, including an owners other income:
As a consequence, sophisticated real estate owners frequently use a combination of legal entities trusts, C corporations, Sub-Chapter S elections, and limited liability companies to buy, manage, and sell their real estate assets. The owners typically engage in subsequent complex transactions between the entities to minimize legal and financial liability or maximize their personal tax benefits.
Higher Rates Down Payments
Joe Parsons, senior loan officer with PFS Funding in Dublin, California, said that the interest rates charged on second and investment properties can vary widely. He uses the example of a $400,000 property. If lenders consider that property a second home, a borrower who puts down 20 percent could expect an interest rate of 4.125 percent for a 30-year fixed-rate loan.
But if that same borrower were to buy the identical property as an investment home, the borrower would probably be charged an interest rate of 4.875 percent with the same down payment of 20 percent, Parsons said. If the borrower came up with a larger down payment of 25 percent, the interest rate would probably fall to 4.5 percent, Parsons said.
Down payments are another potential challenge for buyers purchasing second homes or investment properties. Mindy Jensen, community manager with real estate investing social network BiggerPockets, says that you might be able to purchase a second home with a down payment of as low as 10 percent of that home’s final sales price. But most lenders will require that 25 percent down payment for investment properties, Jensen said.
Qualifying for a loan for a second or investment property can be challenging, too. That’s because you might already have an existing mortgage loan that you are paying down, and those monthly payments are included in your debts.
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Second Home Or Investment Property: What’s The Difference
People commonly use the terms “second home” and “investment property” interchangeably when talking about a property that isnt a primary residence. But the concepts are different:
- Second home. A “second home” is a property someone lives in for part of the year, like a vacation home.
- Investment property. An “investment property” is used to generate income, such as a rental house.
Mortgage lenders generally offer borrowers better loan terms on second home loans than investment property loans. The difference in termsprimarily a lower interest ratemight tempt someone who plans on using a property as a rental to call the place a second home when taking out the loan. But thats a bad idea.
Purposely taking out the wrong type of loan to get a better deal is mortgage fraud. Also, even if you truthfully state on a loan application that you plan to use a property as a second home but later decide to rent it out, you could face a foreclosure for violating the mortgage terms.
Investment property loans have higher interest rates to compensate for the higher risk.
Buying A Second Home To Rent On Airbnb Or Vrbo
When is a vacation home not a vacation home? It can be when you decide to rent it out. But not always.
Let us be crystal clear the vacation home vs. rental home topic is evolving rapidly and the answer often depends on the city, county or state laws and definitions.
As a rule, a home that you live in for part of the year, and is rented out for fewer than 180 days can be considered a second home or vacation home. Any home that is rented out for 180 days or more is an investment property. Thats the tax definition. Your lender may not agree with this definition, nor the local government.
If you intend to rent your property out and use it as a vacation home, your best move is to contact the local government. If the vacation home is part of a resort, apartment complex or townhome community, youll also need to check their regulations. Increasingly, rules are being put in place that forbids using units as rentals.
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What Are The Mortgage Rates For A Second Home Vs Investment Property
Mortgage rates for second homes and investment properties may be slightly higher than those for primary residences, as lending on these properties is deemed a little riskier. However, mortgage rates are still at all-time lows. But, rates fluctuate daily, so contact us to learn more about todays rates.
Which Property Type is Right for You?
The best way to classify whether a second home or investment property is right for you is to determine how you intend to occupy the property. Are you looking for a vacation home, or are you looking to earn passive rental income? It is best for both second homes and investment properties to create a wants and needs list and familiarize yourself with our house hunting tips to help you narrow down your search.
From there, you can get in touch with one of our mortgage specialists to determine which financing solution is right for you.
How Do I Compare Investment And Rental Property Mortgage Rates
The only way to find the lender with the most competitive investment or rental property mortgage rate is to compare multiple lenders, and then compare their rates and fees. Within days of being preapproved, youll receive a Loan Estimate from each lender. These let you compare every aspect of the loan side by side, so you can see the total cost including the investment property mortgage rate, origination fee, closing costs and more.
» MORE: How much you could save by comparing mortgage rates
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Second Home Vs Investment Property: Different Mortgage Rates And Requirements
If youve been comparing mortgage rates for the purchase of a second home or an investment property, youre already on a promising path: Youll either have a place to go for vacations, or youll have a place thatll generate income and put more money in your pocket.
Either way, the opportunity to own more than one property is an enviable position to be in, but how you classify that property makes a difference in how much youll pay to finance and own it.
Mortgage Qualifications For An Investment Property
Its much easier to qualify for a second home than it is for an investment property. There will be higher down payment requirements and cash reserves for an investment property because they tend to carry more risk for lenders. Most investment properties have the following qualification requirements:
- At least 15% down
- 2 years of bank statements and tax returns
The interest rate you receive on your investment property depends on your credit score and down payment amount. Since it carries significant risk for the lender the interest rate can be 1- 1.5% higher than a standard mortgage. This can be a significant cost for most borrowers looking to get an investment property.
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Converting Rental Property To Second Homes
Some homeowners may decide to convert their rental property to a second home. Whether they want to help out a relative or simply avoid paying capital gains when the home is sold, a few steps need to be taken. This includes reporting any rental income, filing the necessary paperwork to the IRS, and updating the occupancy status. Before doing so, its best to speak with a tax professional to understand the potential consequences of this move.
Its best to contact your lender before you change your occupancy status, as doing so within a short amount of time after closing could be a red flag for occupancy fraud. Plus, it can mean that youre at risk of breaking or defaulting on your mortgage agreement. If so, you could forfeit your home.
Its important to note that its illegal to mislead your mortgage lender about how your home is classified. If you intentionally decide to misrepresent how you intend to use the home, you could also be subject to significant fines in addition to risking your home.
What Is An Investment Property
An investment property, on the other hand, is one that you purchase with the explicit intention of generating income. The investment property could be right next door to your own home, or it could be in another stateit doesnt really matter. Youll be playing the role of landlord, with long-term or short-term renters paying cash to stay in the home.
Never forget that an investment property is all about the Benjamins, says Lamar Brabham, CEO and founder of financial services firm Noel Taylor Agency. The entire point is to turn a profit. No emotions, no affection.
Before making an offer on an investment property, youll want to crunch the numbers to make sure its a solid investment. Similarly, consider what factors will be important to prospective tenants .
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Do I Need A Second Home Or Investment Property Mortgage
The real estate market is changing and with it, mortgage rules. People are using their homes in new and different ways that can affect the type of home loans they need.
If you want to rent out part or all of your home, or another building on your property, that can affect financing. See a few examples below.
And if youre not sure how your living situation will affect your mortgage loan, connect with a lender to learn more about which rules apply.
Can I Pass Off My Investment Property As A Second Home
Some people try to sell their investment property as second homes to get better financing, but you should never do that. If you lie about your loan application, you may be committing mortgage fraud, which is a federal crime. Your lender’s underwriting team is aware of this possibility, so don’t try to shoot them.
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Second Homes Vs Investment Property
When taking out a mortgage loan, there are several different categories that the loan falls under, depending on what you intend to do with the home understanding the mortgage process will help you navigate the purchase of your second home or investment property easier. For a home that you intend to live in as your primary residence, this would be a primary home. For a home that you intend to live in for a portion of the year, but not the majority of the time, this would be a second home. And for a home that you do not intend to live in at all, but use to generate income, this would classify as an investment property. These distinctions are important, and we are going to go into detail on the key differences between second homes vs. investment properties, and what they mean for you.
Buying Second Homes
The most popular reason you may purchase a second home is for a vacation property. While you may think the home has to be in a destination, it does not. You can purchase a property anywhere in the united states to be used as a second home. The most popular places for second homes are lakes, beaches, ranches, or anywhere else you may like to kick back and relax.
Buying Investment Properties
Why You Shouldnt Lie About Occupancy Type On Your Mortgage Application
Its not a good idea to misrepresent how you plan to live in or rent out your home on your loan application. You will not be the first person who has thought of ways to mislead lenders, and lenders will verify your propertys occupancy during and after the underwriting process.
In the past, lenders would hire people to go knock on doors to verify whether borrowers actually lived in the home. But these days lenders have more sophisticated and high-tech tools to verify occupancy. Lenders can use data analysis and algorithms to spot borrowers who may have lied on their mortgage applications. Data from credit bureau files, utility bills, and tax information can help determine whether your addresses are different than those used on loan applications.
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Buying A Second Home That Will Be Your Primary Residence
One very important thing to note is that a property cannot be listed as your primary residence and your second home at the same time. The criteria differ for each category. A second home is typically defined as a home you would live in for some part of the year. Unlike a primary residence, you do not have to live there for most of the year, and it doesn’t have to be close to where you work. Vacation homes are perfect examples of second homes. They fit the category of being a place you only live in for some part of the year, and they also do not count as investment properties.
There are a few types of loans that can’t be used to buy a second home. For example, you can’t use an FHA loan or a VA loan to purchase a second home. There are also some financial considerations that come into play when you are being evaluated for a second home mortgage. A notable example of this is that most lenders are stricter with the debt-to-income ratio of the buyer as well as their credit score. Affordability, location, and maintenance are three crucial things to consider when you’re looking to buy a second home.
Should I Buy A Condo As An Investment Property
There are some potential drawbacks to consider before investing in an apartment. Apartments can be attractive investment opportunities. They are often priced lower than comparable single- or multi-family homes in a given market and have fewer maintenance issues for homeowners. Get your 43-page guide to real estate investing today!
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Things To Watch Out For When Financing A Rental Property
People often assume they can rent their second home when theyre not using it. This is false, and can land you in trouble. Its critical to understand why you cant ever rent out a property you financed with a second-home mortgage.
The reason this isnt allowed is because of how the IRS treats taxes for second homes. If you own a second home, the mortgage interest and property taxes on that second home are fully deductible just like mortgage interest and property taxes for a primary residence.
Knowing this, it makes more sense that lenders dont allow you to rent out a property with a second-home mortgage on it, because youd be double dipping by getting rental income and also getting the same tax benefit as you do with a primary residence.
If you want to have a second home that you can also rent out, then you need to finance it with a rental property mortgage to comply with lender and IRS rules. This means youll need a larger down payment, and will pay a slightly higher rate, but you will benefit from the income and you can also use the income to qualify for the loan.