HOMES & COMMUNITIES

know that financing a second home or investment property is very different from financing a primary residence. And, while mortgages on second homes and investment properties have some similarities, there are also some key differences.

• Interest rate: You can expect to see a higher interest rate for both second homes or investment properties than for primary homes. Why? Because lenders view those transactions as riskier. If you get into a tight spot with money, you’re far more likely to stop paying the mortgage for your second/ investment property than for your primary home.

• Qualifying: Whether you’re buying a second home or an investment property, you might need to do some extra legwork in order to qualify for that second loan. Your bank may require you to prove that you have healthy cash reserves (so it knows you can afford both mortgages).

It’ll take a long, hard look at your overall financial situation, so be sure everything is on the up and up before you apply.

• Down payment: Depending on your situation and the lender, you might also need to bring a larger down payment to the table for an investment property or second home, typically 15% to 25%. Again, this is because the bank wants a bigger cushion to fall back on in case you default.

• Rental income: If you’re buying an investment property, your lender might allow you to show that anticipated rental income will help cover the mortgage payments. However, proving how much rental income the home will generate can be complicated. Prepare to pay for a specialized appraisal that takes into account comparable rents in your area.

• Location: Your lender may require a second home to be 50 to 100 miles away from your primary home. An investment property, however, can be anywhere in comparison to your primary home, even next door.

• Taxes: Federal income tax rules are different for vacation homes and investment properties. Generally, you’ll treat your second home just as you would your first home when it comes to taxes—if you itemize, you can deduct the mortgage interest you paid up to a certain limit. (The rules vary if you rent out your second home for part of the year.) If you own an investment property, you get to deduct the mortgage interest, plus many of the expenses that come with operating a rental business, but you also have to report your rental income, too.

Why it’s important to not confuse the two

It’s important that you’re totally clear about the difference and not use the terms “second home” and “investment property” interchangeably. Some people try to pass off their investment property as a second home to get more favorable financing, but you should never do this.

If you lie on your loan application, you could be committing mortgage fraud, which is a federal offense.

Your lender’s underwriting team is aware of this possibility, so don’t try to pull the wool over their eyes. They’ll take the big picture into account when deciding what loan terms to offer you, says real estate attorney David Reischer.

“A single-family residence by a lake that is located in a completely different state from the borrower’s primary residence is much more acceptable to be categorized as a second home by a bank underwriter,” he says. “A multifamilyunit property with rental income in an urban area is likely to be treated as an investment property.”

Bottom line: Keep everything aboveboard, and you won’t have to worry about a thing.

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