Are you planning to buy a primary home, a second residence, or an investment property? At the time of applying for a home loan, the first question your lender will ask you is how your property will be utilized. Below we’ve outlined each occupancy type and how it can affect your mortgage’s final cost.
If you are planning to move all of your things in and call that place your home, then you’re purchasing a primary residence. This type of houses qualifies for the minimum down payment (starting from 3%), and they also have the lowest mortgage interest rates. Lenders see primary residences as the less-risky properties, as homeowners would like to maintain that roof over their heads by staying top of payments. To qualify as a primary residence, it should meet the following conditions:
- You must live in the house for most of the year.
- You must be residing in the house within 60 days of closing.
- The house must be a convenient distance from your place of employment.
- In case you already have a house, and you want to refinance it, you need documentation to prove your residence, for example, government identification and tax returns.
SUGGESTION: Consider looking into multi-unit properties in case you want to earn rental income from your new house. Lenders might be able to categorize the home as a primary residence and offer you the lowest interest rates if you’re living in one of the units.
Are you looking for a property to spend your vacations at like in the mountains or on the beach? Or do you travel between two cities regularly because of your work? If you do, then you’re most probably looking for a property that a lender would view as a second home. Remember that classifying it as a “second home” will mostly depend on in what way you’re occupying the house and not whether it is the second home you currently own or you’ve ever bought.
Generally, second homes and primary residences have similar interest rates; however, secondary homes require a higher minimum down payment of 10%. Reserve requirements are also applicable to such residences, meaning that you’ll also be required to have enough liquid assets that can cover a specific number of monthly installments if there is an emergency post-purchase. To qualify as a second home, it should meet the following conditions:
- You must live in the property for at least a few months in a single year.
- The property should be exclusively under your control and not subject to a rental, property management agreement, or timeshare.
- Lenders usually want them to be located at least 50 miles away from your primary residence
SUGGESTION: Remember that a property’s location can affect whether or not it’s viewed as a second home in case you’re not planning to live in it full time. You may be subjected to a higher interest rate of an investment property if the home you choose is located very near to your primary residence.
Are you planning to purchase a new house to create a new source of income? If yes, then it would be viewed by lenders as an investment property. Such properties usually have the highest down payment requirements and mortgage interest rates among all types of properties. Investment properties also have reserve requirements. To be considered an investment property, it should meet the following conditions:
- The house is situated within 50 miles of your primary residence.
- Mortgage interest rates are very high in comparison with the other types of properties, because of the greater risk a lender faces.
- You are planning to collect rent from the property so you will also be required to submit a lease agreement to confirm that a renter occupies it.
- It usually needs a larger down payment and more loan-to-value (LTV) restrictions.
SUGGESTIONS: When you’re planning to buy an investment property, you might not be allowed to include your future rental income from home in your home loan application.
During underwriting, your lender will verify your house’s occupancy utilizing the guidelines discussed above and their discretion. In case you’re unsure what category your property will fall in. Or wondering how your occupancy type might affect your budget then call Lendova Mortgage toll-free at (888)-387-4808. We offer free consultations with one of our mortgage specialists.