Understanding Primary, Second, and Investment Home Mortgages

Understanding Primary, Second, and Investment Home Mortgages

Understanding Primary, Second, and Investment Home Mortgages: A Comprehensive Guide for Realtors and Home Buyers 

As a realtor or a potential home buyer, understanding the nuances of different types of mortgages can be crucial to making informed decisions. A mortgage is not just a mortgage; there are different types for different purposes. In this guide, we'll delve deep into the differences between primary home mortgages, second home mortgages, and investment property mortgages. We'll also touch on the importance of owner occupancy and the need to avoid mortgage fraud.

Primary Home Mortgage

A primary home mortgage is the most common type of loan. This type of mortgage is designed for a property that the borrower will use as their primary residence. Lenders often offer favorable interest rates, lower down payments, and easier qualifying criteria for primary home mortgages because borrowers are less likely to default on their primary residence.

It's essential to be aware of the owner occupancy requirement associated with a primary home mortgage. Borrowers typically need to move into the property within 60 days of closing and live there for at least one year. Misrepresenting a property as a primary residence when it's not can be considered mortgage fraud.

Second Home Mortgage

A second home mortgage is designed for a property that a borrower uses part-time while maintaining another primary residence. This could be a vacation home or a property closer to work or family. The interest rates for second-home mortgages are typically higher than those for a primary home mortgage, and the down payment requirements can also be more substantial.

Lenders usually have specific criteria for a second home mortgage. The property should be a reasonable distance away from the borrower's primary residence and must be available for the borrower's exclusive use throughout the year. The property can be rented however, the borrower must occupy it at some point throughout the year. Typically, they must occupy it for 14 days or 10% of the number of days it was rented in that year. Lenders cannot use projected income from this type of purchase when calculating the borrower’s debt ratio. 

Investment Property Mortgage

An investment property mortgage is intended for properties that the borrower does not occupy but rents out to tenants. Because these loans are considered riskier for lenders, they typically come with higher interest rates and require larger down payments than primary and second home mortgages. Lenders can use projected income from this type of purchase when calculating the borrower’s debt ratio.

When it comes to owner occupancy, investment properties are unique because the owner does not need to live in the property at any point. However, if a borrower claims to occupy the property to secure a lower interest rate and then rents it out, it can be considered mortgage fraud. A lender may hire someone to physically verify occupancy, a practice known casually as an “occ knock”.  Lenders verify owner-occupancy because of the regulatory requirements, financial implications, and risk factors associated with owners living onsite. 

Avoiding Mortgage Fraud

Honesty is paramount when applying for a mortgage. Misrepresenting the intended use of a property to secure more favorable loan terms - such as stating a property will be owner-occupied when it will actually be rented out - is mortgage fraud. This could result in penalties, higher interest rates, or even the call of the full loan amount.

As a realtor or home buyer, it's essential to understand these differences to make the best decisions and avoid any legal issues. Always consult with a mortgage professional to ensure you're getting the right loan for your needs, and remember, transparency is key in the mortgage process.

In conclusion, primary, second home, and investment property mortgages each serve different purposes and come with their own set of rules and regulations. By understanding these differences, you can make informed decisions that align with your financial goals and housing needs.

This article was written by Chris Bufis (NMLS#1405934) with RW Towne Mortgage.