Qualifying for a mortgage: Occupancy matters
When you buy a home, mortgage lenders need to know whether you plan to live there full time. If you’re buying a primary residence, you can get a lower interest rate, make a lower down payment, and qualify with a lower credit score.
If it’s a second home, on the other hand, your mortgage loan will cost more and the lender will enforce stricter requirements.
There are very few scenarios where you can have two primary residence mortgages at once. But it’s not unheard of. Here’s what you need to know.
In this article (Skip to…)
- Primary residence definition
- Occupancy requirements
- Buying your next home
- Living in two homes at once
- Qualifying for the loan
What is a primary residence?
Typically, your primary residence is the home where you spend the majority of your time. For example, if you live in Ohio for most of the year but spend a couple months in Florida, your Ohio home is your main home. A primary residence can also be called a “principal residence” or “primary domicile.”
Even if you split your time evenly between two homes, one of them will still be considered your primary residence for mortgage lending and tax purposes.
Your primary residence is defined as the address:
- Where you get most of your mail
- Where your cars are registered
- Listed on your driver’s license
- On your IRS income tax returns
- On your voter registration card
Even if you can make a case for having two primary residences at once, only one home at a time can be designated your primary residence by the IRS and your mortgage lender.
Occupancy requirements for mortgage lending
When times get tough, homeowners are more likely to keep up mortgage payments on their primary residences than on additional properties. So, compared to loans for rental properties and vacation homes, primary residence loans are less risky for lenders.
Less risk means lower mortgage rates and easier qualification requirements for buyers. Fannie Mae conventional loans, for example, add 3.375% in fees for second homes with 20% down. These fees translate into higher interest rates for borrowers.
Government-backed single-family mortgages — such as FHA, USDA, and VA loans — work only for financing a new primary residence. You cannot use these loan programs to buy a home unless you plan to live there full time.
Residence type impacts your taxes, too
Home occupancy types have big tax implications. Primary residences are exempt from capital gains tax on profits up to $250,000 ($500,000 if married and filing jointly). This, effectively, eliminates the capital gains tax for many home sellers.
Eliminating a 20% capital gains tax on $250,000 saves $50,000 — a big tax benefit compared to selling a second home or vacation home.
Real estate property taxes tend to be lower on primary residences, too. And a lot of tax deductions and tax credits apply only to primary residences.
Buying a new primary residence while keeping your existing home
Your current primary residence may not be ideal indefinitely. What if your family outgrows the home? What if you get a new job in a new city?
Lenders understand that your plans and needs might change. And you can buy a new primary residence without selling your existing home, as long as you have enough income to make both house payments. (If your existing home is paid off, your lender will still consider ongoing insurance and property tax payments when qualifying you for the new home loan.)
To get a new primary residence mortgage, you’ll need to certify that you intend to use the new home as a principal residence. In most cases, you’ll need to move into the new home within 60 days of closing.
When you move, you should get in touch with your existing lender to share your plans for the home, just to make sure no changes to your loan status are required. And contact your homeowner’s insurance company to see whether your current coverage is still sufficient — especially if you plan to rent the home out.
Buying a new home and renting out the old one
When you buy a new primary residence, you could convert your existing home into a rental home. Rental income could help cover the cost of holding two home mortgages at once. But before you do this, get in touch with your lender or loan servicer about your plans for the home. Again, changes to the loan may be necessary.
Contact your homeowners insurance company, too. A standard homeowners policy won’t adequately protect a rental home. You’ll need a landlord insurance policy.
Also keep in mind that owning an investment property can complicate your income taxes. You may need to hire a CPA or another tax professional to work out the tax details. For example, you may become a self-employed taxpayer.
What if you really do live in two homes?
What if you live in two homes pretty much equally? For tax purposes, you’ll have to designate one of the homes as your primary residence, even if it’s an arbitrary choice.
Typically, you cannot finance both homes as primary residences simultaneously. But lenders might consider allowing it under certain circumstances. It may be possible to have two primary residence mortgages at once if you’re moving for unavoidable reasons — for example, if your family outgrew your existing home or if your company moved you to a new job in a new city.
Considerations for two primary residence mortgages:
- Distance: How far apart are the two houses?
- Work: Does your job create the need for two houses?
- Family: Has your family expanded to the point that you need an extra house? Or do you have a dependent you’re purchasing property for?
The type of home loan will also make a difference. Since government-backed loans finance only primary residences, these loan programs have clear rules about owner occupancy.
Conventional loans on two primary residences
They’re not insured by a federal agency, and they’re not limited to financing primary residences. But conventional conforming loans still follow rules set by the government-sponsored enterprises, Fannie Mae and Freddie Mac.
These rules include charging higher mortgage interest rates on second homes and investment properties. Normally, Freddie and Fannie allow a homeowner to finance only one home at lower primary residence rates.
When you can have two conventional loans at once:
- Buying as a caregiver: If you own your own home but want to buy a separate home for your adult child who has a disability, Fannie and Freddie can treat the new home as a primary residence loan. Likewise, an adult child can buy a home for an aging or ill parent and get lower primary residence rates
- Non-occupant co-borrowers or co-signers: You could co-borrow or co-sign to help a friend or family member while also buying your own primary residence — assuming you have income to cover both monthly payments
- Military members on duty: A military service member can retain owner-occupied status while deployed or on active duty away from home
Lenders will likely decide your fate on a case-by-case basis. It’s smart to document your need for two primary home loans. The easier you make it to approve your request, the more likely you are to get what you want.
FHA loans financing two primary residences
The FHA will not approve a new loan for a second home or investment property. The FHA loan program exists to finance primary residences.
Since these loans work only as primary residence mortgages — and since homeowners can have only one primary residence — borrowers can’t have more than one FHA loan at a time. BUt, again, there are possible exceptions.
When you can have two FHA loans at once:
- You’re relocating for a job that’s far away (specific distance requirements vary)
- You’ve outgrown your current home and have already paid off 25% of its value (in other words, the loan-to-value ratio, or LTV, is 75%)
- You’re divorcing, though spouses who keep the house may be able to refinance their homes into their own name
- You’re a co-signer for someone else’s FHA loan
Of course, for any of these scenarios to work, you’d need enough income to afford both monthly payments. And you’d need to meet your lender’s eligibility requirements.
VA loans on two primary residences
Like FHA loans, VA loans — which help military veterans and service members buy their own homes — exist to finance primary residences.
However, the Department of Veterans Affairs understands that service members move around a lot, especially when they get new duty assignments. The VA does not require homeowners to sell, pay off, or refinance their VA-financed home before buying a new one elsewhere.
But second home loans may not get one of the VA’s signature benefits: borrowing with no down payment.
Some vets can get two loans with no money down. It depends on how much VA loan entitlement the borrower has remaining. Second VA loans require a higher upfront VA funding fee than first-time loans, too. VA loans never require mortgage insurance.
Home buyers must move into their newly financed VA home within 60 days of closing unless the VA grants an exception.
USDA loans on two primary residences
The USDA, which guarantees loans in rural and some suburban areas, will never allow a borrower to have more than one USDA loan at a time. But a homeowner could convert a USDA-financed home into a second home or investment property and then buy another primary residence with a different type of loan.
This works only after the homeowner has used the USDA-financed home as a primary residence for at least a year.
Just like with any other type of mortgage, the homeowner would have to qualify for two loans at the same time. Qualifying includes having enough income to make both house payments.
Occupancy rules vs. qualifying rules
In some situations, your loan type and lender can grant permission for two primary residence loans at once. But getting permission to apply isn’t the same as getting approved to borrow. You still need to qualify for two mortgage loans simultaneously.
That means meeting the credit score minimums and other underwriting rules. It also means earning enough steady and reliable income to cover both house payments along with your other debts.
And it means having the cash reserves to cover the new home’s down payment and closing costs. Down payment assistance programs normally work only for primary residences and/or first-time home buyers.
Two primary residences FAQ
Yes, married spouses could buy separate primary residences if they don’t co-borrow on each other’s mortgages. Each borrower would need enough income and credit to qualify for a mortgage as a sole borrower. Even though they have separate mortgages, the state may consider both homes joint marital property.
If you buy a home for the sole purpose of earning rental income, and you won’t be spending time there yourself, it’s considered an investment property. A second home or vacation home is a home you plan to live in for at least part of the year. This distinction matters because interest rates and fees differ between vacation home and investment property loans. Be sure to make your intentions for the property clear to your loan officer.
You can claim the tax benefits of a primary residence if you’ve lived in the home two of the past five years. This rule doesn’t apply to mortgage lending.
Yes, if you can qualify for two loans at once, you can buy multiple homes at once. Some homeowners use cash-out refinancing or home equity loans to generate down payments for a second home. But in most cases only one of your homes can be considered your primary residence for lending and tax purposes.
What are today’s mortgage rates?
Mortgage rates depend on whether you’re buying a primary residence (least risky and cheapest to finance), a second home (tougher guidelines and sometimes risk-based surcharges) or a rental/investment property (riskiest and most expensive).
If you’re a first-time homebuyer, you’ll automatically get primary residence rates. If you already own a home, you’ll get a better deal if you’re buying a new primary residence.
The best way to find out is to share your unique borrowing needs with a lender. Applying for online pre-approval is a great way to start the conversation.