If you’re in the market for a new home, it’s important to understand the differences between primary and second home mortgages. While the two types of mortgages may seem similar, there are some key differences that you should be aware of before you start your search.
A primary home mortgage is used to purchase a home that you plan to live in full-time. This is the home where you will spend the majority of your time and where you will be registered to vote, receive your mail, and pay your bills. Primary home mortgages typically have lower interest rates and require a smaller down payment than second home mortgages.
On the other hand, a second home mortgage is used to purchase a home that you plan to use as a vacation home or as a rental property. Second home mortgages typically have higher interest rates and require a larger down payment than primary home mortgages. Additionally, lenders may have stricter requirements for second home mortgages, such as a higher credit score or a larger cash reserve. Understanding the differences between these two types of mortgages can help you make an informed decision about which type of mortgage is right for you.
Primary vs Second Home Mortgages
If you’re considering buying a second home or investment property, you may be wondering how financing differs from purchasing your primary residence. Here are some key differences to keep in mind when comparing primary and second home mortgages.
Definition of Primary and Second Homes
A primary residence is the home you live in for the majority of the year, while a second home is a property you own but only occupy for a portion of the year. Investment properties are properties that are not occupied by the owner and are instead rented out to tenants.
Differences in Lender Requirements
Lenders typically have different requirements for primary and second home mortgages. For example, lenders may require a higher credit score, lower debt-to-income ratio, and more assets and reserves for a second home mortgage. Additionally, lenders may require a larger down payment and more equity for a second home mortgage.
Down Payment and Equity Requirements
Down payment and equity requirements are typically higher for second home mortgages than for primary residence mortgages. Lenders may require a down payment of 10% to 20% for a second home mortgage, compared to as little as 3% for a primary residence mortgage. Additionally, lenders may require more equity in the property before allowing a cash-out refinance or home equity line of credit (HELOC).
Interest Rates and Mortgage Types
Interest rates on second home mortgages are typically higher than primary residence mortgages. Additionally, some mortgage types, such as VA and FHA loans, may not be available for second homes or investment properties. Conventional loans are a common option for second home mortgages.
Risks and Insurance
Investment properties come with additional risks, such as the possibility of tenants damaging the property or not paying rent. As a result, lenders may require additional insurance coverage for investment properties. Additionally, lenders may require higher reserve requirements for investment properties to ensure that the borrower can continue to make mortgage payments in the event of a vacancy.
Financing and Qualifying
Financing and qualifying for a second home mortgage may be more challenging than for a primary residence mortgage. Lenders may require a larger cash reserve and more extensive documentation, such as tax returns and rental income statements. Additionally, underwriting criteria may be stricter for investment properties.
If you’re considering an investment property, keep in mind that lenders typically have even stricter requirements for these properties. For example, lenders may require a higher down payment, more equity, and a higher credit score. Additionally, interest rates on investment property mortgages are typically higher than on primary or second home mortgages.
In summary, financing a second home or investment property can be more challenging than financing your primary residence. Lenders have stricter requirements and higher down payment and equity requirements. However, with the right preparation and documentation, it’s possible to secure financing for a second home or investment property.