When you apply for a mortgage, it matters whether you’re applying for a loan on a primary residence, secondary residence, or investment property. Let’s make sure the differences are clear.
If you’re planning to live in the home full-time, it’s a primary residence. From the mortgage lender’s perspective, this means the lowest risk and, therefore, usually the best rates and lowest down payment.
The interest paid on a mortgage loan up to a certain amount for a primary residence is also tax deductible.
The type of home doesn’t have a bearing here. Your primary residence can be a house, a condo, a townhouse, a floating home, or any other type of home.
Note that you can claim only one home as your primary residence and spouses must claim the same one.
But what exactly do lenders use to judge full-time?
- You must live in the home for most of the year
- It must be located reasonably close to your workplace
- You must move in within 60 days of closing
- You must not plan to convert the home to an income property within 12 months of closing
If you’re thinking of refinancing a primary residence, you’ll show that you live there full-time through tax returns, voter registration, or other documents.
Note that a primary residence can also be an income property … if you have a multi-unit property and live in one of the units. The one(s) you’re not occupying can be rented out.
If you’re planning to buy a home for getaways or limited stays, it’s probably a secondary residence. Generally, a lender is able to offer a similar interest rate for a secondary residence but may require a larger minimum down payment or a higher credit score. You may also need to show that you have funds to make payments for a certain number of months.
Here’s what lenders look for to classify a home as a secondary residence:
- You must live in the home for some of the year and no one else can claim the home as a primary residence
- Generally, the home must be located more than 50 miles from your primary residence
- The home can’t be under a rental, timeshare, or property management agreement. The home should be available year-round for your exclusive use and enjoyment.
- Only 1-unit homes are eligible to be classified as secondary residences
In some cases, you may be able to rent out the home for a small part of the year. Secondary residence loans are also tax deductible, but you need to be aware of the required balance between rental days and days you stay in the home.
Note that a home you own that’s “too close” to your primary residence will likely be considered an income property and come with higher rates. So if you’re dreaming about a convenient lakeside cabin or a condo in the city, make sure you pay attention to the distance.
An investment property is a home that you plan to use for income, whether you’re renting it out under a lease or taking on short-term rentals. Because they’re considered riskier than primary and secondary residences, they usually have the highest interest rates and down payments. You’ll also need to show your ability to pay for multiple months.
Lenders look for these conditions:
- You plan on having a someone else occupy the home as their primary residence, such as a tenant or a family member …
- Or you plan on renting it as a short-term rental
Because you’ll be making income from the property, ask your lender if that income can be considered when reviewing your loan; it may be possible if you have a lease agreement in place.
You must report earnings from an income property on your tax return, and will likely be able to deduct certain expenses such as the cost of materials to maintain the property.