Home Purchasing, First Time Buyers

How Your Lender Sees Your Primary Residence vs. a Second Home or Investment Property

Did you know that a lender views your primary residence differently than they’d view a second home, and that an investment property is considered something else altogether? 
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The occupancy type can affect the terms and the cost of your mortgage. So, if you’re applying for any type of mortgage, this information is useful. Here’s everything you need to know about how your occupancy type affects your mortgage!

How Lenders View a Primary Residence

A primary residence is— as the name implies—the house you live in for the majority of the year. This house must be near your place of employment. In addition, you usually have to move into the house within 60 days of closing for it to be considered a primary residence. 

The benefits of a primary residence: they tend to qualify for the lowest possible down payment (usually a minimum of 3%) and they also qualify for the lowest mortgage rates. That’s because your lender is taking on comparatively less risk when they loan you money for a primary residence. Lenders consider primary residences to be low risk because people are motivated to keep a roof over their head by continuing to pay each month. 

When refinancing, you may need to prove to your lender that this home is your primary residence. This could be as simple as showing them your driver’s license with the home’s address on it.  

How Lenders See a Second Home

A second home can be one of a few things. It might be a vacation home, such as a beach house. Or if you spend a lot of time in two different cities for work, it could be an additional residence. It doesn’t literally mean that it’s the second home you currently own, and it also doesn’t mean that it’s the second house you’ve ever bought. 

Here are the benefits of a second home as opposed to an investment property: while they require a bigger down payment than a primary residence (usually a minimum of 10%), the interest rates are about the same as they would be for a primary residence—that is to say, fairly low. 

If you use this property as a rental or a timeshare, it is disqualified from being considered as a second home. Some other requirements: you have to live in the house for part of the year, and it can’t be within 50 miles of your primary residence. If these conditions are not met, you’ll have to consider it as an investment property. 

And, How Lenders View an Investment Property

An investment property is a property you’re planning to earn money from. It cannot qualify as a primary residence or a second home. If you plan on collecting rent from a property, it’s an investment property.

The downside is that you’ll have to put down a larger down payment and pay higher interest rates than you would for a primary residence or a second home. But the upside is that you’ll be able to make rental income from this property each month! 

You might have to provide proof that the property is a rental. You can do this by submitting a lease agreement to your lender. 

Want to Learn More about Applying for a Mortgage?

Mortgages are confusing to many people, which is why you should have a trusted lender to guide you through the process. If you’re still not sure how your property should be classified, or if you’re wondering how much you’ll have to budget for your mortgage, feel free to get in touch with us today. We look forward to hearing from you! 

WRITTEN BY: Massimo Ressa