Primary Residence Mortgage Rules

Every mortgage application you complete will involve you answering the question of how the property you intend to purchase will be used. The options include primary residence, second home, and investment property. The option you select will play a part in determining the mortgage rates you will get. They also have different requirements that need to be met before the mortgage can be approved.

Primary residences typically get the lowest interest rates among the three options. This is because lenders generally believe that a buyer will be more inclined to repay a mortgage for the house that they live in. The fact that it is the roof over your head is extra motivation to keep up with payments. It is also due to this reason that mortgages for primary residences come with the lowest value for down payments and are the easiest to get.

The boxes that a property must check for it to be considered a primary residence are:

• You have to live in the home for most of the year.
• The home must be within reasonable proximity to your workplace.
• You have to start living in the house within a 60-day period after closing the mortgage.

Buyers should also note that refinancing a primary home mortgage requires proof of residency.

Don't wait, check your eligibility for a second home loan here.

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.

Buying A Second Home to Rent

Buying a second home that will be used as a rental property comes with a number of advantages, most notable of which are the tax deductions. But on the flip side, it also means that a buyer will become a landlord and have certain responsibilities that will require time and energy. It is one thing having a second home that you only visit for yearly vacations, and it is an entirely different thing to have a second home that will be rented out.

As far as tax deductions are concerned, there are two conditions under which a property will be considered a second home. They are:

1. You must live within the property for at least 14 days per year.
2. You must reside in the house for at least 10 percent of the days that it is rented out.

An example of these conditions being met is a second home that you rent out for 200 days in a year and live in for at least 20 days in the year. Meeting these conditions ensures that the house qualifies for a second home mortgage.

Considering that second home mortgages are usually easier to qualify for than investment property mortgages and come with lower interest, it is important for you to carefully evaluate all the criteria involved in meeting them.

Ready to buy a second home? Or maybe you want to purchase an investment property. You need to know the difference between the two, because getting a mortgage loan for one is usually a more complicated and costly process.

Lenders usually charge buyers higher interest rates when they are borrowing mortgage money for an investment property that they plan to rent out and eventually sell for a profit. There's a reason for this: Lenders consider loans for these homes to be riskier. Because buyers aren't actually living in these homes, lenders believe that they might be more willing to walk away from them -- and their mortgage payments -- if they suffer a financial setback.

The higher interest rates provide some extra protection to lenders. Lenders will also require that buyers come up with a higher down payment -- usually at least 25 percent of a home's final sales price -- when they're borrowing for an investment property. Again, this comes down to protection. Lenders believe that buyers will be less likely to walk away from the loans on their investment properties if they've already invested more of their own money in these homes.

When you're ready to buy a second home, then, it's important to know whether you're purchasing a second home or an investment property.

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.