There are three types of ways you can utilize a property you are financing. They are a primary residence, second home, or investment property.
A primary residence is a home in which you live in as your principal residence, and typically occupy at least a majority of the year. In order to be eligible for financing a primary residence, at least one applicant must be occupying the property.
There are two other circumstances in which you may qualify for a primary residence loan even if you will not live in the property, and they are (this is quoted from Fannie Mae guidelines):
- Parents or legal guardian wanting to provide housing for their physically handicapped or developmentally disabled adult child (if the child is unable to work or does not have sufficient income to qualify for a mortgage on his or her own, the parent or legal guardian is considered the owner/occupant).
- Children wanting to provide housing for parents (If the parent is unable to work or does not have sufficient income to qualify for a mortgage on his or her own, the child is considered the owner/occupant).
A second home has the same loan terms as a primary residence with the exception that these loans require at least ten percent down. There are many criteria for a property to be considered eligible to be financed as a second home. Generally, it won’t be within reasonable commuting distance of your work and it will be a property you will not rent (often). The home must make sense that it’d be utilized as a second home, and this decision is rendered by the underwriter.
Fannie Mae also has these specific requirements:
- Must be occupied by the borrower for some portion of the year
- Is restricted to one-unit dwellings (cannot finance a multi-unit)
- Must be suitable for year-round occupancy
- The borrower must have exclusive control over the property
- Must not be rental property or a timeshare
- Cannot be subject to any agreements that give a management firm control over the occupancy of the property
An investment property is owned but not occupied by the borrower. These loans come with greater down payment requirements and higher interest rates which are explained in this link. The primary reason why someone will purchase an investment property is for the potential income derived.
Here is the language on the occupancy clauses in the standard Fannie Mae / Freddie Mac deed of trust:
Borrower shall occupy, establish, and use the Property as Borrower’s principal residence
within 60 days after the execution of this Security Instrument and shall continue to occupy the Property as
Borrower’s principal residence for at least one year after the date of occupancy, unless Lender otherwise
agrees in writing, which consent shall not be unreasonably withheld, or unless extenuating circumstances
exist which are beyond Borrower’s control.
Occupancy. Borrower will occupy and use the Property as Borrower’s second
home. Borrower will maintain exclusive control over the occupancy of the Property,
including short-term rentals, and will not subject the Property to any timesharing or
other shared ownership arrangement or to any rental pool or agreement that requires
Borrower either to rent the Property or give a management firm or any other person
or entity any control over the occupancy or use of the Property. Borrower will keep
the Property available primarily as a residence for Borrower’s personal use and
enjoyment for at least one year after the date of this Second Home Rider, unless
Lender otherwise agrees in writing, which consent shall not be unreasonably withheld,
or unless extenuating circumstances exist which are beyond Borrower’s control.
Pre-Qualify Now: https://ajaffe.gofirsthome.com/startapp
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