Understanding how property usage can affect the mortgage rate and credit score are straightforward, but buyers sometime forget to consider them. This dynamic is something that Karen likes to ensure her clients have all the information available so they can make informed decisions.
The most common things that affect mortgage rates are credit score, debt-to-income ratio, and property location. Less common is concern over “occupancy type,” though it can significantly alter your rate. Simply put, “occupancy type” covers how one uses a property, and generally fall into three categories…
Principal Residence
This is the home where you live most of the time. For mortgage purposes, this is the home where you spend most of each year, and it is also the address listed on your federal and state tax returns.
Second Home
This is a property you occupied “part-time.” Most frequently, this means a vacation home—a cabin by the lake or a house on the beach. If your job requires you to split your time between two locations and you decide to buy a house in the second location, that would also be considered a second home.
Investment Property
This is a property purchased with the intention of generating income. A primary residence can turn into an investment property if, for example, a tiny house is built in the yard, and rented out. Flipping a house also makes it an investment property. Also, a vacation home that is occupied a few weeks annually, and then rented out the rest of the time becomes an investment property. Actual usage can create “designation” fluidity.
Why Do Mortgage Rates Change by Occupancy Type?
The different rates attached to different occupancy types primarily revolve around risk level perceptions. For example, if somebody lives in their primary residence, and owns a duplex that is being rented out, lenders must consider which monthly payment would most likely STOP with a situation change. Lenders consider second homes riskier than principal residences, and investment properties riskier than both. Higher risk usually equals higher down payment, and higher credit score required for best rates.
The Importance of Transparency
It’s illegal to intentionally misrepresent the intended use of a property. Such misrepresentation can result in fines, and cause default on loan agreements. Some mortgage companies randomly inspect second homes to make sure they aren’t being rented out. The IRS considers your second home a residence if you use it for at least 14 days per year or 10% of the days you rent it out, whichever is greater, although lenders can be stricter.
Retiring, and wondering about moving to your beach house, and renting out your primary residence? You can change occupancy status if you have had the mortgages for about a year, even if they’re not paid off yet.
Considering buying a second home or an investment property? Forewarned is forearmed. Be transparent with your lender, and check with Karen for all the facts. She would love to answer any questions you may have. As always, Karen would love to help you with all your real estate needs. Contact her today.
