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Second home versus investment property: Mortgage rates and rules

Peter Miller
The Mortgage Reports contributor

Financing a second home or investment property: What to expect

If you got a mortgage for your primary residence (the home you live in), you might expect to get the same interest rates or loan offers on your second home.

But that’s not the case.

Whether you’re buying a vacation home or an investment property, you’ll pay higher mortgage rates and have to meet stricter guidelines to qualify.

Here’s what you can expect when you apply for a second home or investment property mortgage.

Verify your eligibility for second home financing (Apr 5th, 2020)

In this article:


Second home mortgage rates vs. investment property mortgage rates

Mortgage rates are higher for second homes and investment properties than for the home you live in. Generally, investment property rates are about 0.5% to 0.75% higher than market rates. For a second home or vacation home, they’re only slightly higher than the rate you’d qualify for on a primary residence.

  • Second home mortgage rates: Usually less than 0.50% higher than your primary home rate
  • Investment property mortgage rates: Around 0.50% to 0.75% higher than your primary home rate

Of course, investment property and second home mortgage rates still depend on the same factors as primary home mortgage rates. Yours will vary based on the market, your income, credit score, location, and other factors.

If your financial situation has changed since you bought your first home, your new mortgage rate might vary by a wider margin than average.

Verify your new rate today (Apr 5th, 2020)

Second home (vacation home) mortgage rates and rules

Here’s what you need to know about mortgage rates and requirements if you want to buy a second home: one you’ll live in for part of the year, but not full time.

Occupancy: part-time occupancy required

Lenders expect a vacation or second home to be used by you, your family, and friends for at least part of the year. However, you’re often allowed to rent the house out when you’re not using it. Rules vary by lender.

Second home interest rates: slightly above market

A second home is not a primary residence, so lenders see more risk and charge higher rates. But not nearly as high as investment property rates.

Down payment: usually 10% or more

Some lenders will want 10 percent down for a vacation home. And if your application isn’t as strong (say you have a lower credit score or smaller cash reserves), you may have to put 20 percent or more down.

Credit score: 640 or higher

The purchase of a second home or vacation home requires higher credit scores, typically in the 640 or higher range. Lenders will look for less debt and more affordability, think of tighter debt-to-income ratios. Strong reserves (extra funds after closing) are a big help.

Verify your eligibility for a second home loan (Apr 5th, 2020)

Investment property mortgage rates and rules

Here’s what you should know about mortgage rules if you’re purchasing an investment property: one you will not live in at all and plan to rent out year-round.

Occupancy: not required

If you’re financing a home as an investment property, and you plan to rent it out full-time, you are not personally required to live in the building for any amount of time.

Investment property loan rates: 0.50% to 0.75% above market

Mortgage rates are quite a bit higher for investment properties. Often, your interest rate will be 0.5% to 0.75% higher for an investment property than it would be if you were buying the same home as a primary residence.

Down payment: 15% to 25%

Down payment requirements for an investment property range from 15 percent for a one-unit property to 25 percent for a two- to four-unit property. You may also be required to make a bigger down payment depending on your application and the type of loan you qualify for.

Private lenders — sometimes called “hard money” lenders — might also make asset-based loans. The borrower puts down 30% or 40% of the purchase price and the lender provides the balance.

Flippers often use such short-term mortgages to finance their deals. However, this can be risky. If the property does not sell for the amount required to cover the loan, or if the property does not sell at all, the borrower can face foreclosure and the loss of all equity.

Credit score: 640 or higher

Lenders generally require borrowers to have a credit score above 640 for an investment property loan. However, rates can run very high for low credit scores. Hopefully your score is 680-700+ before you think about investing in real estate.

Verify your eligibility for an investment property loan (Apr 5th, 2020)

For comparison: Primary residence mortgages

When discussing second home and investment property mortgages, rates and rules are measured against those for primary residences. To give you a clear idea of what those benchmarks are, here are the typical lending rules for primary home mortgages:

Occupancy: required

Borrowers can purchase properties with one to four units using residential financing, provided they live in one of those units.

>> Related: Guide to types of home loans

Generally, the home must be occupied within 60 days of closing. If married, both spouses must occupy the property. The property can be a single-family home or part of a multi-unit property such as a condo complex

Interest rates: standard market rates

Because residential financing involves little risk, mortgage rates are low relative to vacation homes and investment properties. The market rates you see advertised by banks and lenders apply to primary residences.

Down-payment: starting at zero percent

Residential borrowers can finance with zero down for VA qualified borrowers, 3.5% down with FHA mortgages, 5% down with conforming financing, and 3% down with the Freddie Mac Home Possible program or the Fannie Mae HomeReady mortgage.

Credit scores: Starting at 500

You can finance a primary residence with a lot lower credit than you could for an investment or vacation property. FHA loans allow credit scores as low as 500 (with 10% down) or 580 (with 3.5% down). And most lenders allow credit scores starting at 620.

Why rates and loan options are different for second mortgages

The home you live in (your “primary residence”) is seen as the least risky form of real estate. It’s likely to be the one bill homeowners will pay if times get tough. A vacation home or investment property, on the other hand, is riskier. Borrowers are a lot more likely to forego those payments when money is short.

Because of the higher risk second homes pose, they come with stricter rules about financing.

As shown above, those rules include above-market interest rates, bigger down payments, higher credit scores, and more.

Of course, borrowers will find different lending standards for different types of property, depending on the lender and the mortgage program. So it’s important to compare loan options before financing a second home.

Find vacation or investment financing (Apr 5th, 2020)

Can you avoid higher rates on a second home mortgage?

When you apply for a mortgage, you must declare how you intend to use the property. And lenders take such declarations seriously. That’s because they don’t want to finance riskier investment properties with residential financing.

It might be tempting to list your second home as a primary residence, and profit from lower rates or easier qualification. But it’s unwise to do so.

Lying on a mortgage application can land you fines in the thousands. In very serious cases, mortgage fraud can even lead to jail time.

So always be truthful with your lender. And ask plenty of questions if you’re not clear on the loan rules. For instance:

  • Are you allowed to have overnight rentals?
  • Are there limits regarding how many nights you can rent?
  • How much time must you spend there for it to qualify as a vacation home instead of an investment property?
  • Can you have an accessory dwelling unit?

Get answers in writing to ensure you fully understand the requirements for your second mortgage.

And if you’re having trouble qualifying with one lender, or finding the loan program you need, try another lender. They all have different loan options and rates.

Find and lock a low mortgage rate today (Apr 5th, 2020)

Do I need a second home or investment property mortgage?

The real estate market is changing — and with it, mortgage rules. People are using their homes is new and different ways that can affect the type of home loans they need.

If you want to rent out part or all of your home, or another building on your property, that can affect financing. See a few examples below.

And if you’re not sure how your living situation will affect your mortgage, connect with a lender to learn more about which rules apply.

Homes as hotels (Airbnb and VRBO)

The growth of Airbnb and similar services means that homes can be used to generate income in new ways. A spare bedroom, basement apartment, or converted garage can now generate substantial revenues. In major tourist destinations, prime residences are being converted to overnight rentals, raising home prices.

Generally, you can rent out part of your house and still finance it as a primary residence. But if you plan to use the home for vacationing yourself, and also rent it out, you’ll need a second home mortgage.

Accessory dwelling units or tiny homes

The affordable housing shortage in many areas is causing entire states to change zoning laws. Many homeowners are now able to build or purchase smaller homes on the same land lots as standalone single-family homes.

For example, New Hampshire now allows “accessory dwelling units” (ADUs) with up to 750 square feet on single-family lots. Oregon has eliminated single-family zoning in many communities. California is allowing multiple units for lots once restricted to single-family homes.

This could be a back-road for homeowners who want to purchase an investment property without an investment property mortgage. You might purchase a home with an ADU already attached, and live in the main unit. Or use a cash-out refinance on your current home to build an ADU on your property — as long as you keep living in the original building.

Either way, you can rent out the side property for some extra cash, even though it was technically purchased with a primary home mortgage.

Second homes as first homes

These days, some buyers are even purchasing a vacation home as their first home. This can be a good workaround for young professionals who want to buy property, but can’t afford it in their home cities.

But remember: In this situation, even though you’d be buying a vacation home with your FIRST mortgage, it still qualifies as a SECOND HOME mortgage. That’s because you wouldn’t be using the property as your primary residence.

Check second home and investment mortgage rates today

Mortgage rates for second homes and investment properties are higher than for primary residences.

But today’s interest rates are low across the board — which means you’ll still pay less for a second home mortgage than you would have a year or even a few months ago.

Check your personalized rates to see what you qualify for today.

Verify your new rate (Apr 5th, 2020)