Differences Between Second Home Vs Rental Property Mortgage

A second home is a unit of a property that you intend to live at least a year or visit on a regular basis. On the other hand, a rental property or also known as an investment property is usually purchased to gain passive income and occupied by tenants for at least a year as well.

There are significant differences between these 2 properties, especially in terms of mortgage rates and requirements. So, what are the differences between a second home vs rental property mortgage?

Mortgage Rates

Occupancy can greatly affect the mortgage rates investment property you are offered. There are 3 kinds of occupancies linked to mortgage loans, which are primary, second home, and investment.

Lenders typically charge higher interest mortgage rates for second home and investment properties due to higher risks.

Borrowers can cut off and run from these types of properties when things get hard. Borrowers will prioritize their primary homes when times get financially rough.

Lenders charge mortgage rates on second home and investment properties averagely 0.50 percent to 0.875 percent higher than a primary property. The rate can be even higher if you make a low down payment and you have a low credit score.

Second Home Vs Rental Property Mortgage

Qualifying Requirements

Besides charging higher interest rates for second home and investment properties, lenders also apply stricter requirements for mortgages on these 2 properties.

A lot of lenders require a minimum credit score of 720 for a second home property and 700 for a rental property.

These apply when you make the lowest, allowable down payment. Lenders may even require you to have enough cash in your hands to cover the payment for up to 6 months.

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You will have to prove that you have enough income for the payment of the second home or rental property you are going to purchase.

In most cases, the rental income you get from your rental property cannot be used to meet the requirements unless your tax returns show that you have property management experience.

Down Payment

Lenders require you to make a higher down payment for rental properties than second home ones in order to protect themselves from the extra risk of default.

Typically, the minimum down payment for a second home is 10 percent. While for a single-family rental property, lenders may require a down payment of 15 percent to 20 percent and 25 percent for 2-unit to 4-unit multifamily rental property.

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