Secondary residence loans aren’t the same as investment property loans, even though each loan finances a property that isn’t the owner’s primary residence. The lines between second homes and investment property blur when owners intend to rent out their second homes for part of the year, making an investment property loan a better option. Mortgages are either for secondary homes, investment property, or primary residences. Find out how secondary residences are funded and the options that best suit your unique needs.
Second homes serve as vacation homes or homes that are lived in for part of the year, in addition to the owner’s primary residence. It’s common for secondary residence loans to require the property to be in a vacation or resort area and be a certain distance from the owner’s primary residence.
Secondary residence loans typically have lower interest rates than investment property loans, but there are usually a few restrictions specified in a rider along with the mortgage:
- The property will be a second home for the borrower
- The property will be available for the borrower’s exclusive use
- Timeshare or rental pool properties don’t qualify
- The property owner must control the occupancy and use of the property, limiting the ability to rent or have a management firm or other person control the property
For tax purposes, a property is considered a secondary home if two criteria are met:
- The owner lives in the home at least 14 days a year.
- The owner lives in the home at least 10% of the time it’s rented out.
An Investment property, like a secondary residence, isn’t your primary home. The main goal of any investment property is to make money, generate income, appreciate in value, or take advantage of tax benefits.
Investment property may include residential rentals, commercial properties purchased to flip or resell, and land purchases. They typically attract loans with higher interest rates and require more money down than second home loans. Investment property mortgage rates are commonly 0.50% to 0.75% higher than primary home loans. Investment properties also typically require a 15% to 25% down payment.
Primary residences usually have the lowest interest rate of the three options, mainly because lenders expect people will prioritize paying their primary mortgage. Primary residence loans have the lowest down payment requirements and are easier to secure approval. Financing and refinancing primary home mortgages requires meeting specific criteria.
Primary residences have three main requirements:
- Principal residence for the majority of the year
- Reasonably close to work for those who aren’t remote
- Occupied within two months of closing the mortgage
Secondary Residence Loans
With the rising popularity of rental options like Airbnb, it’s essential to make sure that you meet the lender’s requirements to qualify for a secondary residence loan. It’s best to be upfront with prospective lenders when seeking to finance a secondary residence. Depending on your intentions, a secondary residence loan or an investment property loan may be the most appropriate fit. Rates are less than 0.50% higher than primary home loans.
Secondary residence loans are easier to secure than investment property loans, and they offer lower interest rates. Lenders may not allow a secondary residence loan to finance a property the borrower intends to rent out, even for a limited time. Rental income regulations vary by lender. Carefully review the lender’s criteria for qualifying for a secondary residence loan. Down payments are typically 10% but may increase to 20% for those with lower credit scores. Lenders look more closely at debt-to-income ratios and credit scores.
Secondary residence loans can’t be obtained through the FHA or Veterans Administration. Requirements for secondary residence loans are tighter than primary home loans.
Watch Your Budget
Before considering a secondary residence, know your budget and financing options. As with any loan, ensure you have enough money for a down payment, closing costs, monthly payments, and other expenses like utilities and maintenance. If you intend to rent the property for part of the year, be sure to let your lender know of your future intentions for the property. Have contingency plans for vacancies and unexpected repairs or maintenance. Secondary homes may require hiring people to maintain the property during periods you aren’t there. Seasonal properties may also need to be winterized.
Research property values and rental rates if you’re considering renting out the property. Visit homes or cabins in areas you’re considering and talk to homeowners in those areas. Expenses for secondary homes are primarily the same as those you pay for your primary residence. Fixed expenses include property taxes, insurance, regular maintenance, property management services, and homeowner’s association dues. Single-family properties won’t have the often costly association fees townhomes and condominiums have, but some neighborhoods and resort areas may have homeowner’s association fees.
Variable expenses to plan for include unexpected repairs, significant expenses like new shingles and appliances, legal fees, and loss of rental income if you’re planning to rent it out part of the time. It’s best to overestimate potential expenses when planning finances.
Risk is involved in property purchase since the market has ups and downs. Secondary home markets like cabins may have more fluctuations than regular homes during times of recession. Consider your risk tolerance and brush up on the past and forecasted market performance in the areas you’re considering. Banks have tighter credit requirements and give higher interest rates for secondary residence loans, with investment property loans offering the highest rates of the three mortgage options.
While secondary residences are often held long-term by families, it’s always wise to consider an exit strategy, ensuring that it will retain its value and marketability when the property is eventually sold. Backup plans are wise to have if circumstances or needs change.
Secondary residence owners have different goals, either seeking to pay off the mortgage, upgrade to a larger property down the road, or tap into rental income potential. Buying for a reasonable price is a good investment by itself; some secondary residence owners may pull equity to make updates and increase the value of their properties.
Need More Information About Secondary Residence Loans?
Financing a secondary residence can be tricky, especially for those who may want to earn rental income when the property would otherwise be vacant. Be upfront with potential lenders when looking at your financing options. If you’re looking at a secondary residence loan and would like more information on financing options, reach out to the knowledgeable team at Titan Funding. Our experts would be happy to answer any questions or set you up for a consultation. Give us a call at 855-912-8313 or use our online contact us form