When you fill in a mortgage application form you will be asked how your property would be used. The three potential classifications of a property are a primary residence, a second home, or an investment property. This might be a minor detail but how you categorize the home will affect the type of mortgage you can apply for, the interest rates, and requirements needed to qualify for the loan.

Here is what you need to know about the three types of occupancy.

Primary Residence

A primary residence is the main home where you will most likely live and spend most of your time. It can be a variety of dwelling types like a home, an apartment, a houseboat, or even a trailer.

The following criteria are necessary for a property to qualify for a primary residence

  • You must live in the home for almost all the year round and it should be where you receive most of your mail.
  • The property must be reasonably close to your place of employment.
  • You must sign a form that says you will occupy the house within 60 days of closing. (your spouse can satisfy occupancy requirement if your loan is a VA loan and you are on active duty)
  • It can be a single unit or a multi-unit property but you must be living there full time.
  • The address must be listed on your tax returns, driver’s license, and car registration.

Primary residence mortgages are easier to qualify for as lenders feel more confident lending to people who are going to love and care for the home.

The mortgage rates are the lowest and they have lower down payment requirements. Some conventional loans offer a minimum of just 3% down. Additionally, you are eligible for different types of loans which include VA loans, USDA loans, FHA loans, and conventional loans.

When your property is established as a primary residence some aspects are tax-deductible. For example, as of 2018, homeowners can deduct mortgage interest on home loans up to $750,000 both on primary as well as secondary residences. You can also claim mortgage insurance payments if you have purchased your property after 2006.

If you are planning to convert the home into an investment property within 6 months of closing on the home then you should classify it as an investment property.

If you are want to earn rental income from your home you could purchase a multi-unit property, But, you should live in one of them so that it can be classified as a primary residence.

Second Home

It is also known as secondary property or vacation home. It is a term used for a home that you will occupy for part of the year like on holidays, vacations, or during certain seasons. The classification of a second home will depend on how you use the property and not that it is the second home that you currently own or have purchased. The property must meet certain criteria to be classified as a second home.

  • The property must be a reasonable distance of about 50 to 100 miles from your primary residence and must be reachable by car the whole-year round. However, exceptions are allowed. It can be a beach house just 30 miles away from your primary residence.
  • It must be only a single-unit dwelling and you must occupy it for some portion of the year.
  • They have higher interest rates and a down payment of at least 20%
  • The credit score requirements are stricter and also you should have enough liquid savings to cover a few months of mortgage payments.
  • You can rent your second home for up to fifteen days. However, if you rent out for more than 15 days you would have to claim the income and deduct some things that are considered as rental expenses. However, you cannot rent it out for more than 6 months in a year.
  • You must use the home for at least10% more than the days you rent it out or at least 14 days in a year whichever is greater.
  • You can avail of a mortgage tax deduction if you ensure your home remains eligible for a second home status by spending the required time at the house. Otherwise, it will be classified as an investment property.

Investment Property

An investment property is a property you purchase intending to derive an income. You can rent it out as a primary residence or a vocational rental, or fix-and-flip it for a profit. The characteristics of an investment property is that:

  • An investment property can be a single-family residence, a multi-unit dwelling, or even a condo.
  • The property should be at least 50 miles from your primary residence.
  • You have fewer mortgage options. You can get a conventional loan to buy an investment property, but you cannot use either an FHA or a USDA loan. You may qualify for an FHA loan if you purchase a multi-unit property but you will have to live in one of the units.
  • The income from this property must be reported on your tax returns and you could deduct costs in connection with the maintenance of the property.
  • They an excellent way to supplement your income but are the most challenging properties to finance and the guidelines for approval vary from lender to lender.

If you need expert advice and guidance on how loans for these properties types work contact one of our home loan experts today.