Differences Between A Secondary Home and An Investment Property You NEED To Be Aware Of

Whether you’re purchasing a second home or an investment home, many factors will be the same. You’ll want a good location, a good interest rate, attractive financing, and good resale value. However, there are substantial differences between a second home and an investment property, and it’s essential to know the difference between the two.

Differences Between Investment Properties And Second Homes

Financing

Lenders generally view investment properties and second homes as riskier than primary homes. Therefore, you can expect to pay a higher interest rate than you did for your primary residence.

Qualifying

The guidelines for qualifying for a mortgage on a second home or an investment property will probably be more stringent than they were for your primary residence. You may need proof of cash reserves as well as evidence of a better financial situation than you needed for the mortgage on your primary home. You may also need pro forma income statements that show the rental income will be enough to cover the cost of the mortgage and upkeep.

Down Payment

Your lender may require a significantly higher down payment – usually between 15 and 25 percent – for an investment property or second home. This provides a greater cushion to the bank in case of default.

Location

If you’re purchasing a second home, your lender may require that it be at least a specific distance from your primary home, but this varies by lender and isn’t absolute. An investment property, however, doesn’t usually have this requirement.

Tax Liability

Investment properties are subject to different income tax rules than second homes. While second homes may be treated the same as a primary residence for tax purposes, investment properties can be considered a business, so the rules and deductions are different. It’s prudent to seek the advice of a tax professional to determine if an investment property can be of benefit to you.

The Importance Of Clarity In Classification

You must be clear on the difference between a second home and an investment property. Incorrectly stating the purpose of a piece of property on the mortgage application could result in mortgage fraud, even if the error was unintentional. Mortgage fraud is a federal offense.

Regardless of your stated intention for the property, the mortgage underwriters may apply their own interpretation. For example, a single-family residence in a distant resort town will likely be classified as a second home, while a multi-family dwelling in a residential area nearby will likely be classified as an investment property. Correctly classifying your property can make a substantial difference in the terms of your mortgage, especially if you’re interested in homes for sale in Dallas or any other town. Currently, there are many attractive interest rates for residences, but the finance terms may be less favorable on commercial or investment properties.

Whether you’re looking for homes for sale in Dallas or any other area, it’s prudent to locate a reputable lender and get pre-approved before you start your search. Pre-approval will let you know the price range you can afford so you can eliminate areas that are undesirable or too expensive. Getting pre-approved will also show your realtor that you’re serious about purchasing a home or investment property, and they may be more inclined to spend additional time with you.