How will you be using that additional home you’re buying? Here’s why underwriters want to know the answer.

Today we’re exploring the difference between buying a second home and buying an investment property. Typically, there are different rules at play for each scenario. 

One clear example is the down payment: You can buy a second home with as little as 10% down. However, underwriters use a set of guidelines to make sure that your property will be used as a residence and not as an investment. 

They’ll ask you questions to confirm you’re not going to rent out the property. They’ll even go so far as to double-check your tax returns to make sure that’s the case. 

They’ll also want to know why you’re buying a second home. Perhaps you’re buying in a resort community, or your job demands that you work in a certain area for a certain amount of time each year. Is the home at least 100 miles away from your primary residence? Have you been a landlord in the past? These are all common questions.

“Second homes generally have a better interest rate than investment properties.”

Underwriters get particular because, when you buy an investment property, they ask for a minimum of 15% down (some increase it to 20% down because not all mortgage insurance companies will cover that purchase when you also buy an investment property). 

What is the condition of the home? How much are the rents going for in that area? If it is currently rented, typically most mortgage companies let you use 75% of the rental income to help offset that mortgage. For instance, if that home is rented for $1,000, most mortgage companies will let you use $750 to apply to offset the mortgage on that particular home. 

Second homes generally have a better interest rate than investment properties, but it is a case-by-case system; reach out to a seasoned mortgage professional for the proper guidance in helping you determine what makes the most sense. 

We hope to answer more questions like this in the near future, and if you have other questions in the meantime, don’t hesitate to give us a call or send an email. We’re always here to help.