Differences Between a Primary Residence, Second Home, and Investment Property

When filling out a mortgage application, you’re asked to state your intentions for the property. In other words, you must declare if it will be your primary residence, a second home, or investment property.

This might seem like a minor detail, but it’s important to answer this question honestly. Not only because this determines the type of loan you’re eligible to receive, but also because intentional false statements on your application could constitute mortgage fraud.

To ensure you answer this question correctly, here’s what you need to know about different types of properties.

What is a primary residence?

If you’re a first-time homebuyer or a repeat buyer, chances are you’re filling out an application to get a mortgage for a primary residence.

A primary residence is where you live most of the year and where you receive your mail. From a lender’s standpoint, a primary residence is also located near your place of employment.

Mortgage loans for these residents are easier to finance and easier to get. They typically have lower down payment requirements (as low as 3%), and you’re also eligible to use a variety of mortgage programs.

These include conventional loans, VA loans, FHA loans, and USDA loans*.

What is a second home?

A second home is just that—a second home. Although it’s not your main home, you’ll occupy the property for part of the year, maybe on the weekends, holidays, or during certain seasons.

This property must be located away from your primary residence to be considered a second home, at least 50 to 100 miles, in most cases. When a second home is too close to a primary residence, mortgage lenders may classify the property as a rental home.

This, however, isn’t a hard and fast rule. For example, you might live inland and have a second home 30 miles away near the beach.

When you purchase a second home, this property is used exclusively for your enjoyment. The property might be in the mountains, near the beach, or near a ski town. You don’t rent out the house for profit.

Second homes do pose a greater risk, though. If you run into money problems, you’re more likely to stop paying the mortgage on a second home before the mortgage on your primary residence. Therefore, second homes tend to have slightly higher mortgage rates and bigger down payment requirements.

What is an investment property?

An investment property is a property purchased for the sole purpose of generating income. This includes a vacation rental, a fix-and-flip home, or a rental home that earns monthly income.

These properties are an excellent way to supplement or earn passive income, but they are also riskier. For this reason, investment properties typically involve higher down payments, higher interest rates, and some loans have a cash reserve requirement.

It’s also important to note that buying an investment property means fewer lending options. You can use a conventional loan to purchase an investment property, but you can’t typically use an FHA loan, nor can you use a USDA loan. You can, however, use an FHA home loan when buying a multi-unit property—but only if you’ll live in one of the units.

Give us a call whether you’re buying a primary residence, a vacation home, or an investment property. The loan experts at Blue Spot Home Loans can provide first-time home buyer tips, information on the lowest mortgage rates, fixed-rate mortgages, and calculate your expected closing costs. Call (800) 976-5608 or fill out the contact form.

*Cherry Creek Mortgage Co., Inc. NMLS #3001, dba Blue Spot Home Loans is not endorsed by, nor acting on behalf of or at the direction of the U.S. Department of Housing and Urban Development, Federal Housing Administration, U.S. Department of Agriculture, Veterans Administration or the Federal Government.