When you’re shopping for a home, you’ll hear a lot of questions regarding the type of home you’re looking to buy. We’re not just talking about the obvious condo, co-op, duplex, or single-family home question, either. Both lenders and realtors want to know whether you’re working with a primary residence, a secondary residence, or an investment property.
If you’re purchasing your first home, it’s simple; you’re buying a primary residence. But if it’s a second home, knowing the benefits of each can help you determine the best answer and help you understand how each property can work for you. If you’re feeling a little lost on the art of juggling multiple homes, this article is for you.
A primary residence is precisely what it sounds like. This is the home that you will be using the most—the place where you live most of the time. Getting a mortgage for a primary residence is the easiest, simply because it’s deemed a necessity by most lenders.
If you are going to have a hard time with down payments, getting a new primary residence might be the only thing you can do. However, it’s worth it. With that in mind, people with multiple houses need to be aware that their primary residence will determine which state’s taxes they pay. So, choose wisely.
Any home that you use a smaller portion of the year as living quarters is considered to be a secondary residence. This includes summer homes, pieds a terre, and any other label that fits the bill. Even if you use it as a “commute home” less than half of the year, it’s considered a second home.
With a secondary residence, the decision to make money off the home just doesn’t happen. At all. Period. Though you can choose to rent it out later on down the line, the fact is that your intentions matter more.
Your secondary residence will be somewhat harder to get, primarily because there will be rules about down payments that you may need to cope with. You should expect higher mortgage rates, higher down payments, as well as a need to prove that paying your primary residence’s mortgage won’t harm your ability to pay off a second mortgage. Some co-ops will only accept secondary home applications if you pay in cash. So, there’s that issue to consider as well.
Should your living situation change, converting your second home to your primary residence is a relatively straightforward process.
Not to be confused with a secondary residence, an investment property is a house, apartment, condo, or co-op that you bought with the expectation of it acting as a source of income. Investment properties can take many different forms, including “fix and flips,” multi-family apartments, or properties that you want to turn into an Airbnb.
Because investment properties are often done as partnerships, many lenders will want to see the financial information of all borrowers before a deal is struck. In the vast majority of cases, though, you will need to go through commercial means to get funding for an investment property.
Like secondary properties, investment properties tend to carry higher standards when it comes to lending. This can lead to higher mandatory down payments, as well as higher rates. Even if you have the money, many lenders will avoid qualifying you if you don’t have your other residences paid off.
If you’re thinking about getting a new secondary residence or investment property, you might be considering fudging the truth about your borrowing situation to make it happen. After all, getting a secondary residence with the interest rates of a primary residence does sound appealing, doesn’t it?
Please don’t do it!
Most people don’t realize this, but lenders are well-aware of common scams—including claiming to buy a secondary residence instead of an investment property. If you are caught lying, you can be charged with mortgage fraud. This carries hefty fines and, depending on the scale of fraud, possible jail time.
If you are looking for a mortgage loan for a new property, you need to be aware of the type of property you’re applying for. It’s going to be one of the first things that your mortgage loan officer asks you, and it will impact everything you do in the lending process.
For the most part, primary residences are going to be the easiest type of mortgage loan to get. If you’re looking for a secondary home or an investment property, you will face higher standards on all fronts. This can prove to be challenging for most borrowers. That’s why most real estate agents want to see a high-income level before you even consider getting a second home. When in doubt, the best payment option is always cash.