If you buy a home that you do not intend to live in, it is not your primary residence. But that doesn’t automatically mate it a second home either, as many people mistakenly think it’s called. If you aren’t living in the home, it could be one of the two things – either a second or investment property. They both have differences, so understanding them can help you use the right terms when trying to secure financing.
The Second Home Defined
A second home is a home that you will live in, just not year-round. It’s not the home where you receive your mail and spend a majority of your time. Many people use this type of home as a vacation home or weekend home. They visit it occasionally, but then eventually go back to their primary residence for full-time living.
In order to qualify as a ‘second home,’ the home must be situated a certain distance from your primary residence. The exact difference depends on the lender and/or the program. Some lenders go as far as requiring the property to be located within a resort or other destined vacation area.
A few other requirements the home must meet in order to be considered your second residence are as follows:
- You must have exclusive rights to the home (it cannot be a timeshare)
- You must occupy the home at some point during the year
- The property must not be rented out when not in use by you
- You must be able to access the property all year
The Investment Property Difference
Now we are going to compare the second and investment home. An investment home, as the name suggests, is a home you buy for the sole purpose of making a profit. You may buy it to rent it out and make a profit that way. You may also buy it with the intention of fixing it up and selling it for a higher price. Either way, you don’t intend to live in the property at any point, which is the main difference from the second home.
Why the Difference Matters?
You need to know the difference between an investment and second home because of the types of financing that are available. Lenders are often more lenient with financing for a second residence than an investment property. You can usually obtain a lower interest rate and put down a lower down payment than you could on an investment property.
Because the terms are often friendlier for primary and secondary homes than investment homes, lenders are very careful about determining if a home is not an investment home. Typically, the home must be located at least 50 miles away from your primary residence in order to be given a shot. Underwriters will also look at the type of home. For example, if the second property is a condo and you live in a single-family residence, it’s more believable that it is a property you will visit occasionally for vacation purposes and then return home. If, on the other hand, the properties are close in size, age, and location, a lender may have a harder time believing that it’s not an investment property and an attempt on your part to make some money.
It’s vital that you are honest with your lender about what you intend to do with a property. Lying about its use is mortgage fraud and could leave you with very unpleasant consequences. If you plan to rent the home out or flip it for a profit, be honest with your lender. They can help you find the most affordable program to help you get the most for your money.Click to See the Latest Mortgage Rates»