What's in this article?
Primary residence. Second home. Investment property.
What’s the difference? And does it matter when it comes to getting a mortgage? (Hint: Yes, it does!)
Every mortgage application begins by asking how you plan to use your new property.
To help you get the best mortgage product, your mortgage lender will need to understand whether you’re going to use this property as your primary residence, a second home, or if you want to use it as an investment property.
Because your mortgage rates will hinge on how you identify the property, it’s essential to understand what each one means.
This post will explain the differences between a primary residence, second home, and investment property. We’ll also look at mortgage rates, credit scores required, and occupancy rules for each classification.
Why does property occupancy matter?
How you intend to use your property will affect the interest rates your lender can offer. It can also impact your mortgage approval eligibility.
The reason for this is rooted in your lender’s risk assessment of the situation.
When you apply for your mortgage, your lender reviews your financial situation as well as the property you’re interested in buying. This helps them assess how likely you will be to pay back the mortgage—on time and in full.
The lower your assessed risk, the lower your mortgage interest rate will be. Unfortunately, the opposite is also true.
The more significant, or higher, your assessed risk, the higher your interest rate can be.
Increased risk can also mean a more challenging path to mortgage approval.
Every lender is different, and you’ll need to check the specifics for any lender you’re interested in partnering with to purchase a primary residence, second home, or investment property.
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What makes a property a primary residence?
Regardless of whether you’re interested in a single-family home, condo, or townhouse, lenders consider your property a “primary residence” if you intend to spend most of your time there.
If you’re unsure, consider these questions:
- Will you live there for more than half of the year?
- Do you plan to have your mail delivered to the address?
- Does your driver’s license have this address on it?
If you answered yes, the property you’re interested in buying would likely meet the classification requirements for “primary residence.”
A mortgage on a primary residence is often easier to qualify for than mortgages for other occupancy categories, like a second home or investment property.
In addition, primary residence mortgages often have lower interest rates available in comparison to second homes or investment properties.
To find out what interest rate you might qualify for, fill in this online form.
Lenders consider primary residences to be less risky. They expect homeowners to keep mortgage payments up to date and pay the total amount because they want to have a home to live in.
To qualify as a primary residence:
- You’ll need to live in the property for a majority of a calendar year (i.e., more than six months)
- Your property must be located within a reasonable or commutable distance from where you work
- You’ll need to move into the property and begin living there within 60 days of your closing date
- For refinancing, you’ll need to have official documentation such as government-issued identification (driver’s license, passport, etc.), tax returns, etc., showing the property address as your primary or home residence.
What makes a property a second home?
If you want to use your new home as a vacation property, then it will most likely be classified as a “second home.”
The classification “second home” has to do with how you intend to occupy it, not whether it’s actually the “second home” you’ve bought or whether you already own a “first” property.
To qualify as a second home:
- You’ll have to live in the property for a part of the calendar year
- You won’t be able to use the property as a rental property, Airbnb, timeshare, etc.
- No one else can have control over the property (you won’t be able to have a rental tenant)
- Your property will also have to be a single-dwelling—not a duplex or triplex.
- Finally, you must be able to live in your property year-round (A three-season cottage wouldn’t qualify for a second home classification).
What makes a property an investment property?
If your plan for a new property involves renting it out or putting it to work to earn extra income, then you’ll be looking at an “investment property.”
Of the three classifications (private residence, second home, and investment property), investment property has the highest interest rates. It typically also requires a larger percentage of a down payment.
This stems from the fact that lenders consider an investment property a greater risk than primary residences or a second home—because they are non-owner occupied and someone other than the property owner is living there.
Tenants are viewed as a higher risk because they aren’t as invested in the property upkeep as the owner.
To qualify as an investment property you should have plans for your potential property to generate money, i.e., plan on leasing or renting it out (rather than living in it) or “flipping” it for a profit.
Mortgage rates and down payments for each property
The three classifications, primary residence, second home, and investment property, each have different down payment requirements and offer different mortgage rates.
Primary residences tend to have the lowest interest rates available because they are considered the lowest risk of the three classifications.
Primary residences also tend to require smaller down payments, with many conventional loans requiring a minimum down payment of just 3%.
Second home mortgages can often come with higher interest rates compared to a primary residence because of the increased risk to the lender.
They also typically have a higher credit score requirement and need a down payment as high as 20%.
Some second home mortgages also require borrowers to meet specific cash reserve conditions that vary from lender to lender. These cash reserves show potential lenders you have access to enough money to cover mortgage payments for several months, if necessary.
Because investment property mortgages have the highest delinquency rates compared to the other two categories, they tend to have the most rigid eligibility criteria.
As a result, expect your investment property mortgages to come with the highest cash reserve and credit score requirements. They also have the highest interest rates among primary residence, second home, and investment property mortgages.
And plan for at least 20% of the purchase price for a down payment.
How much does credit affect different property loans?
To get the best mortgage interest rates, homebuyers should generally aim to have their credit score as strong as possible. A credit score of at least 760 can often result in borrowers getting the most favorable interest rates available.
Even with lower credit scores, borrowers can access a number of loan options. FHA loans, for example, can require as little as 3.5% down with a minimum credit score of 580 in certain circumstances, while some borrowers with 3% down and credit scores of at least 620 can apply for conventional mortgage loans.
It’s important to note that credit score requirements can vary significantly depending on the type of loan you take out, who insures your loan, your lender, and whether your property is a primary residence, second home, or investment property.
Be sure to check with your lender to see what you qualify for.
Next step: Contact Homefinity
Deciding to buy a new property is exciting—and it can be overwhelming. But it doesn’t have to be.
At Homefinity, we’re ready to bring clarity to the situation and help you make the best decision for your family.
Our experienced staff are waiting to walk you through the process, step-by-step, and help you buy the property you want— for the reasons you want it.
If you’re looking for a rate quote or answers to questions, get in touch.
Just fill out this brief online application, and we’ll set up an appointment that works for you. Let’s talk about the options you have available today.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway. Fairway is not affiliated with any government agencies.