Second Homes vs. Investment Properties

    To the average consumer, there may be little difference between the mechanics of purchasing a second home and those of purchasing an investment property. In the eyes of lenders, however, they are worlds apart. The main differences are the location and use of the property, the down payment, and the asset reserves.

    Location and use: If buyers want to purchase a property that is a few miles from their primary residence, it’s difficult to call this a vacation home. However, if they buy the home for their aging parents so they can live nearby, it is more of a second home than an investment property. Their family members, rather than tenants, would be living there. However, lenders require that a second home be occupied by the primary borrower for at least part of the year. 

    Clearly, these situations aren’t always cut and dried to buyers. This makes it important to be up-front about plans for property use, so lenders can create the appropriate parameters for the loan.

    Down payments: Lenders typically require lower down payments for second homes than for investment properties. Lenders view the investment property as higher risk, so they require buyers to have greater equity at stake when they purchase.

    Asset reserves: Investment properties require higher asset reserves than do second homes. This is due to the nature of the property ownership. If the buyer is relying on tenant payments, the lender faces a bigger risk that the loan payment will not be made. The reserves are a safety net that ensure funds will be available if the property becomes vacant or tenants don’t pay.

    Steve Gronlund 
    Vintage Mortgage Firm
    29290 Via Norte, Temecula CA 92591
    951-695-0901 Cell

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