Mortgage Rules: Second Homes Vs. Investment Properties
So you are planning to acquire an investment home. Or probably are ready to purchase a second home. But do you know that these two property types are quite different where their purchase is concerned? To start with, getting a mortgage loan to purchase an investment property is costly, and the whole application process is complicated.
Financial institutions often charge clients higher rates for investment properties as these are deemed a business venture. The main reason for this is that borrowers are borrowing to acquire investment properties for renting out or even selling for a profit. These loan types are considered riskier than those that are availed to ordinary homeowners. Since the borrowers won’t be staying in their investment premises, the majority of lenders believe they might abscond from their payment obligations if they suddenly find themselves financially incapacitated.
The higher than normal interest rates offer additional protection to the lenders. Moreover, most of the lenders require borrowers to pay a higher down payment – normally at least 30% of a home’s final sales figure, when they receive a loan to purchase an investment property. In this case, it is critical to differentiate whether you are buying an investment premises or a second home.
Like mentioned above, premises owners normally don’t live in their investment properties. Instead, they rent them out all through the year. Sometimes, they might even plan on holding their premises until they appreciate enough in value to allow them to dispose them off for a healthy profit. Unlike second homes, investment properties could be situated near their owner’s main residences.
Can an investment property be a second home?
Second homes are properties in which owners live in them for a given duration of time each year. Simply put, second homes can be deemed to be vacation properties. If their owners don’t live in them on a regular basis, lenders then consider them as investment properties. For a property to meet the criteria of being termed as a second home, then it must be some distance away from your primary residence. In this case, it must be more than fifty miles away from your main dwelling.
Is it worth it tricking the lenders so as the get a given mortgage product?
Since all investment properties attract higher interest rates, some borrowers are tempted to try tricking their mortgage loan provider by claiming that their investment property is in fact a second home. This way, they can then lease their premises and earn a healthy income without incurring a higher interest rate in mortgage payments. In actual sense, this is a mortgage fraud, and if a property owner is found out, they he or she could face stiff penalties. Mortgage fraud is a growing problem around the country, and mortgage loan providers are well trained to discover mortgage applications that seem to be for investing purposes although they made to look like second homes so as for the borrowers to obtain better interest rates.
All in all, you can’t own two vacation homes in the same location, even where most of the dwellings there are deemed second homes. People that own more than one vacation homes in one location therefore are required to consider the second premises as investment properties.