Author Topic: Second Home or Investment Property Loan?  (Read 635 times)

i_have_so_much_to_learn

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Second Home or Investment Property Loan?
« on: June 28, 2018, 03:26:25 PM »
Hi there,

tl;dr: Will a bank allow me to buy an investment property far away from my current home as a Second Home loan instead of an Investment loan?

Long version:
I"m considering buying a property far away from my current home. For example, let's say I live in CA and I want to buy a rental property in either TX or MA.

I will likely be able to afford the mortgage outright if the bank wants me to be able to pay it without investment income.

Is it possible to receive a second home mortgage for this type of property, since the rates are lower? Or would a bank require I get an investment property loan? To be clear, I have inlaws in both locations and travel to the locations regularly to visit family but will not live there. (I can, however, reserve a room or something for my exclusive use if I rent out one of the buildings by room (it is near a university).

Thanks for your thoughts.

sammybiker

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Re: Second Home or Investment Property Loan?
« Reply #1 on: June 28, 2018, 04:16:28 PM »
Yes.

Some local credit unions will have issues with this (they will want the borrower to be a resident of the same state the investment property is in) but larger banks will not have an issue.  A lot of folks have/buy investment properties that are located out of state.

tralfamadorian

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Re: Second Home or Investment Property Loan?
« Reply #2 on: June 28, 2018, 07:18:54 PM »
tl;dr: Will a bank allow me to buy an investment property far away from my current home as a Second Home loan instead of an Investment loan?

If you do not plan to occupy the property as a second home but instead intend to rent it, then it is mortgage fraud to use a second home loan for the purchase.

Dicey

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Re: Second Home or Investment Property Loan?
« Reply #3 on: June 29, 2018, 08:01:25 AM »
Another YES. Specific example: Couple of years ago, we  went to get a mortgage for a new rental. We applied to our major 5-letter bank as an investment property. The agent insisted we write it as a second home, which we ended up doing. We do intend to move into it eventually, but not in the near future. Most banks don't care, and it will save you about half a point. Always go for the longest, cheapest fixed rate money you can get.

Note #1: I'm not against adjustable rate money under the right circumstances ;-)

Note #2: @tralfamadorian, you may be a bit too hasty in slapping this proposed transaction with a fraud label. It ain't necessarily so.

tralfamadorian

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Re: Second Home or Investment Property Loan?
« Reply #4 on: June 29, 2018, 01:33:07 PM »
Note #2: @tralfamadorian, you may be a bit too hasty in slapping this proposed transaction with a fraud label. It ain't necessarily so.

Point taken @Dicey but I do see people getting in trouble with their second home riders. If the OP is seriously pursuing this, I would recommend asking their intended lender for a copy of their second home rider to see how restrictive it is. It's common to have restrictions in there about using a property manager, which would a pretty big pain to have to manage from out of state. Many other riders do restrict renting.

It's also normal practice for mortgage companies to circle back to audit a selection of their primary and second home mortgages. For those audits, one of the checks they do to follow up with the insurer to see if the policy is landlord, second home or primary. Sometimes they'll do that even before closing to make sure the policy matches the loan product.

Here are freddie mac's and fannie mae's riders.

August26th

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Re: Second Home or Investment Property Loan?
« Reply #5 on: June 29, 2018, 02:11:40 PM »
Depends on how you present it to your lender. Itís a big gray area, but the letter of the law would say that youíre likely committing mortgage fraud. And I promise my intent is not to be a jerk.

If you go through traditional lending channels, here is what Fannie Mae calls a second home:

-Must be occupied by the borrower for some portion of the year
-Is restricted to one-unit dwellings
-Borrower must have exclusive control over the property
-Must not be a rental property or timeshare arrangement
-Cannot be subject to any agreements that give a  management firm control over the occupancy of the property

So... CAN you do it as a second home? Probably. Just be careful and decide if itís worth the risk and if you can live with it. The half point difference in rate is less than $100 per month most likely.


Dicey

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Re: Second Home or Investment Property Loan?
« Reply #6 on: June 29, 2018, 04:04:59 PM »
Depends on how you present it to your lender. Itís a big gray area, but the letter of the law would say that youíre likely committing mortgage fraud. And I promise my intent is not to be a jerk.

If you go through traditional lending channels, here is what Fannie Mae calls a second home:

-Must be occupied by the borrower for some portion of the year
-Is restricted to one-unit dwellings
-Borrower must have exclusive control over the property
-Must not be a rental property or timeshare arrangement
-Cannot be subject to any agreements that give a  management firm control over the occupancy of the property

So... CAN you do it as a second home? Probably. Just be careful and decide if itís worth the risk and if you can live with it. The half point difference in rate is less than $100 per month most likely.
August26th, just for fun, I made up some numbers and fed them to Google. This a very simplified example, but it makes the point. Mustachians do not spend an extra  ~ $100 more a month for thirty years on anything without serious contemplation.

The interest on $200k @ 4% will be $143,739.
The interest on $200k @ 4.5% will be $164,813.

The difference of 1/2 point over 30 years? $21,074.

Please note, I am not suggesting hiding anything from anyone, but if your lender is willing to do this with full disclosure (as ours was), why the hell not?

i_have_so_much_to_learn

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Re: Second Home or Investment Property Loan?
« Reply #7 on: July 02, 2018, 01:20:15 AM »
Thanks everyone! To be clear, I was not recommending fraud or anything close to it, just trying to better understand my options. Thanks!

Lmoot

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Re: Second Home or Investment Property Loan?
« Reply #8 on: July 02, 2018, 05:49:14 AM »
Just get "roommates" for your second home, and make it understood that you will be an active roommate but won't be there often (that'll make the roomies happy). Then only go there every year for a little bit; great opportunity to do an annual check up of the place, and do some sprucing up.
« Last Edit: July 02, 2018, 06:02:45 AM by Lmoot »

Fishindude

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Re: Second Home or Investment Property Loan?
« Reply #9 on: July 02, 2018, 07:13:54 AM »
So long as you have adequate collateral and the resources to repay the loan, you can find a bank to loan money for just about anything.
A second home should not be an issue.