A second home is a property that you plan to live in a part of the year (at least 14 days per year) or use the home at least 10% of the days that you rent it out. On the other hand, an investment property is a property that is purchased to generate rental income and is occupied by tenants for the majority of the year.
Lenders have different cost structures and loan qualification requirements for a second home and an investment property. Let’s take a look at what these are if you are considering purchasing a second home or investment property.
- A second home is a property you plan to live in at least 14 days out of the year and at least 50 miles from your primary residence
- An investment property is a property that is purchased to generate rental income and is occupied by a tenant
- Investment properties require at least 15% down payment
- A second home requires at credit score of at least 720 and 6-months cash reserves depending on the lender.
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 ( houses near the beach, a cabin up north, hunting grounds, etc.)
- House you use for work
- Small condominium or apartment when you travel to another state
The house must be a single-unit property and isn’t subject to timeshare requirements. Multi-family units are excluded from second homes. The term “second” home isn’t 100% accurate because you can own more than 1 second home. It’s important to know that depending on which lender you chose to finance your second home with, they may have strict requirements to qualify your home as a second home. Many lenders won’t offer you a mortgage for a second home if you plan to rent it out.
What is Classified as an Investment Property?
An investment property is a house you plan on buying for the sole purpose of renting it out to tenants, short-term rentals, or to fix and flip. The great thing about an investment property is that you aren’t limited to a single unit. If you plan on building your investment portfolio with multiple mortgages, it’s important to know how many mortgages you can have.
An investment property allows you to have multiple units that allow you to earn rental income from your tenants. This can be two-unit, four-unit, or even a commercial property. It all depends on what you will be able to qualify for. An investment property can be:
- Single-family home
- Commercial building
- Multiple-unit building
- Small apartment complexes
It’s worth noting that investment property loans have higher interest rates and require a larger down payment than a second home. This is because investment properties tend to carry a higher level of risk for lenders.
Mortgage Qualifications and Differences for a Second Home
For most borrowers, a second home will add further financial pressure, responsibility, and risk. When considering purchasing a second home, it’s important to consider not just the mortgage costs but the property taxes, property insurance, utilities, and any other fees. Sit down and figure out if you can afford a second home before you start looking for lenders.
Recommended Reading: Conventional Loan vs. FHA – What are the Differences and Features?
Since second homes tend to carry a larger risk for lenders, they will have stricter qualifications than a regular mortgage. These can include:
- Higher minimum down payment amounts ( at least 10% )
- A minimum credit score of at least 720
- Cash reserves of at least 6 months
- Primary residence paid off or at least 50% equity
These will vary by lender and so will the rates they give you. On average, lenders will mark up your interest rate between .50 to .875 percentage points higher than a primary residence.
Mortgage Qualifications for an Investment Property
It’s 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. This is because they tend to carry a higher degree of risk for lenders. Most investment properties have the following qualification requirements:
- At least 15% down
- Credit score above 720
- 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 borrowers looking to get an investment property.
Tax Considerations of a Second Home vs Investment Property
The tax benefits of owning a second home are different than the tax benefits of owning an investment property. Let’s take a look below:
|Second Home||Investment Property|
|Can’t write off expenses||Points you paid on the loan are tax-deductible|
|Mortgage interest, property taxes, and mortgage insurance can be written off||Mortgage interest is deducted from rental income as a tax write off|
|If the property is rented for less than 14 days out of the year, the income is not taxable||Mortgage interest, maintenance, utility bills, and depreciation can be written off|
Depending on the state you live in, you are limited to the amount of mortgage interest you can write off for your primary residence, second home, and investment property. It’s important to consult with a tax professional to make sure of the amounts.
Can you have 2 primary residences?
You can’t have 2 primary residences. It’s important to figure out which home you plan on having as your primary residence and file your taxes accordingly.
Can a husband and wife have two separate primary residences?
It depends on how you file your taxes, however, it is 100% within your legal right to file taxes jointly with your spouse and have separate residences, provided that you are married.
What happens if I live in my investment property?
Owning and living in your investment property is 100% legal. You can live in a building and rent out other units. It’s a great way for people to increase the return on their investment and build equity quicker in the property. It’s very common for landlords to live in a building or apartment complex and rent out other units.
Can a second house be in another state?
Yes, there are no laws preventing people from owning second homes in other states. As long as you occupy the house at least 14 days out of the year you can have a second home in another state.
Can you change a property from a second home to an investment property if I have a mortgage on it?
The short answer is yes, but there are some considerations to take in before you decide to do this. Make sure to read your mortgage clause to be 100% certain that there won’t be any penalties or fees by your lender for doing converting the status to an investment property. If you happen to refinance down the road, you must disclose to the new mortgage lender that your house is going to be an investment property.
Can you finance an investment property with an FHA loan?
This is a common question by many investors who don’t have a ton of cash but still want to get involved in real estate. The great thing is that you can use an FHA loan to fund an investment property, but there are rules that must be followed in order to be able to use the loan program. You can even have multiple FHA loans in some very unique circumstances.
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