When searching for a property, it is a good idea to understand the rules and guidelines of each of the three main property types: Primary residence, a Secondary residence, and an Investment property. Each will not only affect the type of interest rate a borrower may qualify for, but it also affects tax implications if/when one decides to sell.
A primary residence is a property in which a borrower is intending to make their residence. This typically includes houses, townhomes, or condos. Basically it is where the individuals live most of the time.
By choosing a primary residence this allows the borrower to qualify for a lower mortgage rate which can save a lot of money in interest payments over the life of the mortgage. A primary residence also includes tax benefits. Because of these tax benefits, the IRS has set crystal clear guidelines to help determine if the home qualifies as a primary residence.
Characteristics of a primary residence:
- It must be the address listed on the borrower’s driver’s license, tax returns, and voter registration card
- The individual, couple, or family must live their most of the time
If the borrower decides to turn their primary residence into an investment property it is recommended that they do so six months after the closing of the purchase.
A secondary home is a residence in which the borrower intends to occupy in addition to the primary residence. This residence is typically used for only part of the year as a vacation home, although it could also be a residence one visits frequently to conduct business. A second home classification depends on how the borrower is intending to occupy the property, not whether this is actually the second residence a borrower has purchased.
Secondary residences have similar interest rates as primary residences, but could potentially rise due to increased risk for the mortgage lender. Lenders tend to use what is known as the Loan-to-Value (or LTV) ratio which determines the overall loan balance relative to the appraised value of the property. Various lenders have their own LTV limits which could result in the borrower having to provide a larger down payment.
Characteristics of a second home include:
- The borrower must intend to live in the house for some part of the year
- The property cannot be used as a timeshare, rental, or management agreement
- The residence must be located at least 50 miles from the primary residence
- The borrower must have full control over the availability of the residence
An investment property is a real estate property that is purchased with the sole intention of earning a return on investment through rental income. If the borrower chooses to use the property to generate income it must be reported on their tax returns.
Characteristics of an investment property include:
- The property requires a larger down payment and more loan-to-value restrictions
- The property could include condos, homes, multi-units, or single units
- Usually has higher mortgage rates due to an increase in risk for the lender
- They tend to be harder to finance due to various lender guidelines
Understanding what each property type entails will help determine which one is the best fit for you. If you have further questions, please call and speak to one of Bluefire Mortgage Group’s experienced loan originators to help point you in the right direction.