Every mortgage application includes answering the question of how you intend to use the property you are purchasing. You must declare whether the property will be a primary residence, second home, or investment property.
How you answer matters significantly — it determines how much of a down payment you’ll need and what mortgage rate you’ll qualify for. Each property type also comes with different requirements before the mortgage can be approved.
Definition of a Second Home
A second home is a property you purchase in addition to your current home that you intend to live in for part of the year.
Lenders may require proof the property is at least 50 miles from your current residence and will be used as a vacation home, an alternative residence used for work, or a small apartment or condo known as a pied-à-terre. According to the IRS, you must live in the second home for more than 14 days per year or 10% of the total days you rent it to others.
The second home must be a one-unit property and not fall under a timeshare agreement.
Definition of an Investment Property
Investment properties are residences purchased to earn rental income or to flip and sell for a profit. These can be multi-unit or commercial properties, and purchasing several of them can serve as a wealth-building strategy through rental income and property appreciation.
Lending Requirements
Lending requirements for second homes and investment properties are more stringent than they are for primary residences.
Lenders charge higher interest rates due to the increased risk that borrowers can more easily walk away from these types of properties. To compensate, lenders often mark up rates by 0.50 percentage points or more — especially for borrowers with lower credit scores or smaller down payments.
Many lenders require a minimum credit score of 720 for a second home purchase and 700 for an investment property when making the lowest allowable down payment. These are general industry benchmarks — individual lenders set their own requirements. For conventional second home and investment property loans, Refi.com requires a minimum credit score of 620. Speak with a loan specialist for details specific to your situation.
You may also be asked to prove that you have enough reserve cash to cover the second home’s payments for up to six months.
Another challenge is that your existing mortgage payments are counted as part of your monthly debt obligations, raising your overall debt-to-income (DTI) ratio and potentially affecting how much you can borrow.
Requirements for Second Homes
The typical minimum down payment for a second home is 10%. Note that FHA loans and VA loans cannot be used to purchase a second home — conventional financing is the standard option for this property type.
Lenders usually require that a second home be at least 50 miles from your primary residence, since a nearby property is less likely to qualify as a genuine vacation or alternative residence. A common example would be a homeowner in a cold northern state purchasing a second home in a warm southern state to use during winter months.
Buying a second home to use as a rental property can offer notable tax advantages. You can take advantage of second home tax deductions if:
- You live in the property for at least 14 days per year.
- You reside in the home for at least 10% of the days it is rented out.
For example, if you rent out a second home for 200 days and live in it for at least 20 days a year, you’ll qualify for tax deductions. While rental income can be a meaningful benefit, the trade-off is taking on the responsibilities of a landlord.
Rental income is generally not taxable if the property is rented for fewer than 14 days per year. Mortgage interest, property taxes, and mortgage insurance are typically tax-deductible.
Requirements for Investment Properties
Lenders generally require a 15%–20% down payment for a single-family investment property purchase. If you’re buying a two- to four-unit multifamily investment property, you’ll typically need up to 25% down.
Financing an investment property will likely involve higher interest rates and additional fees. To offset this, borrowers can often use projected rental income to help qualify for an investment mortgage.
In most cases, rental income on an investment property can’t be used to qualify unless your tax returns show property management experience. If eligible, you may be able to add up to 75% of the expected rental income to offset the mortgage payment on the investment property.
Lenders that offer this option may require a specialized appraisal that analyzes comparable rent prices in your area.
An exception applies to FHA guidelines: FHA-approved lenders may apply anticipated or actual rental income on a two- to four-unit property to your total income, even without prior landlord experience. You must live in one of the units for at least 12 months to be eligible for this financing option.
Unlike a second home — which typically must be at least 50 miles from your primary residence — an investment property can be located nearby.
With an investment property, you can generally write off mortgage interest, maintenance costs, utility bills, and depreciation. Rental income must be reported if you rent the property for more than 14 days per year.
Don’t Try to Trick Your Lender
Because lenders charge higher interest rates for investment properties, some borrowers might be tempted to misrepresent their purchase — claiming an investment property is a second home in order to qualify for a lower rate while still renting it out for income.
The bottom line: don’t do it. It’s mortgage fraud, and you could face significant fines and legal consequences if caught.
Occupancy fraud is a growing concern, and underwriters are trained to identify mortgage applications that appear to be for investment purposes despite being presented as second home purchases.
Borrowers typically sign an occupancy affidavit at closing, which gives the lender the right to foreclose if they discover the borrower intentionally misrepresented the intended use of the property.
Mortgage companies also use advanced digital verification systems to detect evidence of fraud, and some conduct random site visits to confirm who is actually living in the home.
Underwriters will examine the proximity of the primary residence to the claimed second home — a pattern that can raise red flags. And buyers who own more than one property in the same area may find that the second property is classified as an investment home regardless of intent.
Whether you’re purchasing a second home or an investment property, Refi.com can help you explore your financing options. See if you qualify for a lower rate or start your application with Refi.com today.
