How Do You Occupy Your Real Estate?

If you purchase real estate with the aid of a mortgage, it’s important to understand that how you will use the real estate makes a substantial difference in the eyes of a lender. There are varying rules and guidelines that borrowers must adhere to for qualifying; and interest rates, down-payment minimums and loan-to-value ratios will likely be different depending on how you’ll occupy the real estate.

Primary Residence – This is the home that you mainly live in. It may be the only home you own, or it may be one of many. Lenders offer the best interest rates for primary residences, and the lending guidelines are less stringent. In order for a home to qualify as your primary residence, you must reside in it either full time or the majority of the time. If you own more than one home, a lender may ask for supporting documentation to prove that the home in question truly is your primary residence.

Second Home – Basically this means your vacation home that is at least 50 miles away from your primary home. Of course, you may have multiple “second” homes, but that is how it is named in the lending industry. Second-home financing will be a bit more rigorous with more guidelines to meet and a higher interest rate. In the eyes of the lender, if a borrower becomes distressed, it is more likely that the borrower would default on their second-home loan before they would on their primary residence. Therefore, the lender’s potential risk is higher.

Investment Property – A home held in this way is intended to be used for income, such as fix-and-flips and rental properties, rather than for personal use by the owner. Investment properties come with the most risk for the lender. Not only is it more likely that a borrower would default on an investment property first, but the financial risk the owner is taking, the potential responsibility of serving as a landlord, and the fact that someone else other than a homeowner with a vested interest is living in the property is taken into consideration. Investment property loans are the hardest to qualify for and will have more restrictive down-payment requirements, loan-to-value ratios and the highest interest rates.