Primary residence, second home, or investment property: What’s the difference?

Lauren Michael (NMLS ID: 1705573)
By Lauren Michael (NMLS ID: 1705573)

Primary residence, second home, or investment property? When you apply for a mortgage loan, you’ll be asked how your property will be used. We’ve outlined how each occupancy type is defined and how it may affect the final cost of your mortgage.

Primary residence

Are you planning to move all your stuff in and call this new place “home”? If so, you’re getting a primary residence. 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 homeowners are more likely to stay on top of payments for the roof over their head.

  • You must live in the home for the majority of the year.
  • The home must be located within a reasonable distance from your place of employment.
  • You must be living in the home within 60 days of closing.
  • If you already own the home and are refinancing, you must be able to prove your residence through documentation (i.e. tax returns, government identification).

TIP: If you’re looking to earn rental income from your new home, consider looking into multi-unit properties. As long as you live in one of the units, lenders may be able to classify the property as a primary residence and offer lower interest rates.

Second home

Looking for a vacation home on the beach or in the mountains? Or maybe you travel between two cities for work? You’re probably getting what a lender would consider a second home. Keep in mind that a “second home” classification depends on how you’re occupying the property, not whether this is actually the second home you’ve ever bought or currently own.

Second homes have similar interest rates to primary residences, but require a larger minimum down payment of 10%. Reserve requirements also apply, meaning you’ll need liquid assets that could cover a certain number of monthly payments in case of an emergency post-purchase.

Your property will be considered a second home if it meets these conditions:

  • You must live in the house for some part of the year.
  • The home must typically be located at least 50 miles away from your primary residence.
  • The home cannot be subject to a rental, timeshare, or property management agreement.

TIP: If you won’t be living in your new property full-time, keep in mind that the home’s location can affect whether or not it’s considered a second home. If you choose a home too close to your primary residence, you may be subjected to the higher mortgage rates of an investment property.

Investment property

Thinking of buying an additional property for a new source of income? That would be considered an investment property. Investment properties tend to have the highest interest rates and down payment requirements of all property types. Reserve requirements also apply to investment properties.

Your property will be considered an investment property if:

  • The home is within 50 miles of your primary residence.
  • 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.

TIP: Keep in mind that when buying an investment property, you may not be able to include your future rental income from the property in your mortgage application.

Final note

Your lender will verify your property’s occupancy during the underwriting process using the guidelines discussed above and their own discretion. Not sure how your property will be classified? Wondering how your budget might be affected by your occupancy type? Schedule a free consultation with one of our expert Mortgage Experts.

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