Types of Purchases
A primary residence is the main home in which someone resides. Primary residences qualify for the lowest minimum down payment (as low as 3%) and lowest mortgage rates. Lenders view them as the lowest-risk properties, since home owners are more likely to stay on top of payments.
For your home to qualify as your primary residence, here are some of the requirements:
- You must live there for most of the year
- It must be a convenient distance from your place of employment.
- You need documentation to prove your residence (voter registration, tax return, government identification, etc.)
You can classify one property as your primary residence. If you're married, you and your spouse must claim the same property as your primary home.
Once you've bought the property, you must occupy it within 60 days following the closing date. If the loan originates through the VA, and you're on active duty, your spouse can satisfy the occupancy requirement.
If you plan to turn the property into an investment or rental property within 6 months of closing, you must classify it as an investment property.
When purchasing a second home, you may need a higher credit score to qualify, and you might receive a higher interest rate due to increased risk for the lender. Lenders will review your financials and evaluate your loan-to-value ratio (LTV). Depending on the lender's LTV ratio requirements, you may need to provide a larger down payment.
For your home to qualify as your secondary residence, here are some of the requirements:
- It must be a reasonable distance from your primary residence.
- It must be exclusively under your control and not subject to a rental, time-share or property management agreement.
- You must live there. While someone other than you can also live in your home, some lenders may place a limit on how long a tenant can live there as opposed to the owner.
You can rent it out for up to two weeks and keep the income tax-free. If you rent for 15 days or more, you'll have to report the income, but you may be able to deduct certain things, such as rental expenses. It's important to note that either your lender or the investor in your mortgage may place special limits on how often you rent the property.
Second homes also qualify for the mortgage interest tax deduction. In order to qualify for the deduction, you must use the home for more than 14 days or more than 10% of the days when you would normally rent it out, whichever is greater.
An investment property is a property you plan to use as a rental or to generate income.
For your home to qualify as an investment property, here are some of the requirements:
- The property can be a condo, house, or a multi- or single unit.
- It typically requires a large down payment and more LTV restrictions.
- You plan on collecting rent from the property. If so, you may need to submit a lease agreement that confirms the property is occupied by a tenant.
- Mortgage rates tend to be a lot higher than for other properties, due to the higher risk the lender must take on.
Investment properties can be the most challenging properties to finance as guidelines for approving an investment property loan can vary by lender.
You must report all income generated from your rental property on your tax return. The owner may also deduct expenses such as the cost of materials to maintain the property, interest, and taxes.