Lenders classify properties in different ways depending on how the property will be used. Financing a primary residence is different than financing an investment property. Here are the differences between the two main types of properties. We’ll also explain why the rules are different for each one.
Financing a Primary Residence
What Constitutes a Primary Residence?
A primary residence is, of course, the main home that you own and live in. You can only have one primary residence. Primary residential status is determined on a case-by-case basis, but it’s usually pretty clear-cut: You live there for a majority of the year, it is close to your job, and your voter registration or tax return is listed at that address. You have access to the property all the time and do not rent it out to others. Usually, for it to be considered a primary residence you must occupy the property yourself within 30 to 60 days of closing (depending on the situation) and you must remain there for a year or more.
Financing a Primary Residence
In general, it’s easier to get a loan and the requirements are looser for primary residences than they are for investment properties. That’s because it is believed that you will try harder to pay off your loan if you’re risking the loss of your primary residence. You will have lots of financing options and you’ll be able to easily shop around to find a good mortgage. In addition, mortgage interest is deductible for primary residences.
It is illegal to claim a home as your primary residence if you are renting it out instead of occupying it yourself.
Financing Investment Properties
What Constitutes an Investment Property?
If you’re on this forum, you probably know what an investment property is, but we’ll go over it just the same. If a property is intended to be used exclusively for tenant rental and if it is purchased with the intent of earning a return on investment, it’s an investment property. If the property will be flipped or if it’ll be occupied by tenants rather than your own family, you must classify it as an investment property when you apply for a loan.
What Makes It Different Financially?
It is harder to get financing for an investment property than for a primary residence. Loans on investment properties require better credit scores. They’re also made at higher interest rates with relatively low loan-to-value ratios. You can’t get mortgage insurance on investment properties, and because of that, you’ll need to put at least 20% down to secure bank financing. You might also have to prove that you have enough savings to cover 6 months of expenses on the investment property.
You must report your earnings and your capital gains on investment properties to the IRS.
If you’ve already purchased a primary residence or two and you know the drill, you shouldn’t find it too much harder to finance your first investment property. Find a good lender or other professional who can help you through the process, and you’ll be on your way to owning multiple properties!