Second Homes & Investment Properties
What's the Difference Between a Second Home and Non-Owner Occupied Property?
At a basic level, the difference is easy to understand:
A second home is purchased for your own occupancy as a secondary residence. It could be a vacation home for your own use. It is not intended for use as a rental property. It's not intended for occupancy of a family member.
If you're purchasing on behalf of a family member, check out our Family Opportunity program.
A non-owner occupied property (also nicknamed "investment property") is any property not intended for your own occupancy. It may be purchased for the purpose of rental. It may purchased for the purchase of selling at a higher priced. It may be purchased for a family member or loved one.
How Does the Difference Impact My Loan?
Secondary residences and investment properties are financed differently. Financing for second homes is significantly better than for investment properties. It is favorable in two ways: (1) pricing and (2) down payment requirements. Secondary residences involve better pricing and lower down payment requirements than investment properties.
For this reason, the underwriting process involves some level of scrutiny to ensure it's truly a second home, and the closing involves an affidavit where borrowers attests they truly plan to use it as a second home. There are several anti-fraud measures. More on this later.
Second Home Requirements
Must be occupied by the borrower for some portion of the year
Restricted to one-unit dwellings (no duplexes or multi-families)
Must be suitable for year-round occupancy
Cannot be subject to any agreements that give a management firm control over the occupancy of the property
Must not be rental property or a timeshare arrangement
Must be in location reasonable for a secondary home (for example, not the same neighborhood as primary residence)
Second Home Programs
Conventional Second Home (Loan up to $453,100)
Max 90% financing (10% down minimum)
Minimum 620 credit score
Options including 30, 20, 15, 10 year fixed, 10/1, 7/1, 5/1 ARMs
Must be single-family home or condo only (no multi-family homes)
Jumbo Second home (Loan OVER $453,100)
90% financing (10% downpayment)
Up to $650,000 with 720 credit score
Up to $850,000 with 740 credit score
Overall requirements more strict when exceeding $650,000 loan amount
Up to 45% debt-to-income ratio up to $650,000 loan amount
Available for 5/1 and 7/1 ARMs or 15 to 30 year fixed
No PMI (rate is bumped)
Internal underwriting (we reserve right to outsource)
We'd love to help you explore your options! If you're searching for a home within the next three months, just complete the information at Get Started Online.
Investment Property financing
Max 80% financing (20% down minimum) for single family
Max 75% financing (25% down minimum) for multi-units
Minimum 620 credit score
Options including 30, 20, 15, 10 year fixed
Available on 1-4 units
2018 Conforming Loan limits for WI (and most states):
$453,100 single family
$580,150 two units
$701,250 three units
$871,450 four units
Contact me if you need an investment property loan above the conforming loan limits. It's not common, but I can help you explore some niche options.
How can I legitimately "work around" investment property status?
If you want to avoid the limitations of investment property financing, there's only one way to get around the requirements. Occupy the property. Keep in mind, owner occupied financing only requires you to occupy the property for one year.
If you want to buy your first home, but you also envision owning an investment property, why not do it like this? --
Instead of buying a single family home first, why not buy a multi-family home first? You could potentially buy a 2-4 family with just 3.5% with FHA financing if you will actually occupy it for at least a year.
After living in the property for one year and renting out the other unit(s), then you could purchase a single-family home as an owner occupied primary residence. You could then move out of the multi-family and convert your former unit into a rental unit.
The reverse is not true. Except for very peculiar circumstances, you will not be able to buy a multi-family home as a primary residence when you already own a single-family.
Let's Work Together
As you can see, we're very open about the strengths and weaknesses of each option. We'll help you approach the process strategically and find the options that may best suited for you.
On top of that, we can set you apart as a buyer. When the seller's Realtor sees we're providing your financing, it can make a real difference because of our strong reputation in real estate community. On top of that, we can give you a real head start through our VIP FasTrak program. With this program, you will offer more confidence, more reliability, and if you'd like, a faster closing date than nearly any other potential buyer who's typically much earlier in the mortgage process.
If you'd like to purchase a second home or investment property in the next three months, continue to our Get Started Online page. It's absolutely essential to get in touch early because this type of purchase involves more planning and preparation. This is the essential first step.
"Do we have to call it an investment property?"
As you can see, investment properties involve stricter and less attractive terms. For example, the minimum downpayment on a two-unit investment property is 25%. If it were owner occupied, it could be as low as 3.5% with an FHA loan.
Since the financing package is much better with primary/secondary residency than with investment property status, there is some fraud on this issue. It's called "occupancy fraud".
Occupancy fraud happens when a borrower claims they're planning to occupy the home, while knowing they actually intend to rent it out.
There are several ways this can result in negative consequences for borrowers....
Underwriting challenges. Several clues can prompt a lender to question whether a property is properly categorized as a primary or secondary residence. If the underwriting suspects the property will actually be rented out, you're likely to run into underwriting problems, no matter how late in the process.
Criminal consequences. The U.S. Criminal code imposes strict penalties on mortgage fraud including imprisonment and substantial fines. These crimes are most typically prosecuted when they arise from some other investigation such as an IRS tax audit or criminal investigation.
Foreclosure. Mortgage fraud violates the terms of your mortgage contract. Any breach of the contract, not just late payments, can prompt the lender to call your note due. If you do not promptly pay it off, the lender can foreclose.
Civil consequences. If a lender occurs a loss as a fraud of borrower fraud, they may pursue civil litigation.
On top of that, it can result in consequences for the loan officer (such as myself) and the company who originates the mortgage. So we never want to get involved in mischaracterizing a property that's truly meant as an investment property.
Frequently Asked Questions
Q. If purchasing as a primary or secondary residence, how long do I have to occupy it before turning it into a rental?
A. You must occupy it for one year after obtaining the mortgage. You must occupy it the majority of the time if purchasing as your primary residence or part-time if occupying it as a secondary residence.
Q. If I occupy a property for one year after obtaining the mortgage, can I then rent it out without notifying the lender?
Q. Can I purchase a multi-family home with secondary residence financing if I plan to use one unit as a vacation home?
A. No. You can only purchase a one-unit property as a secondary residence. However, you can purchase a multi-family property as a primary residence if you occupy one unit full-time.
Q. If I am truly occupying a property part-time as a secondary residence, can I rent it out from time to time on as a short-term rental, such as on AirBnB?
A. Here is a note from Fannie Mae guidelines (B2-1-01: Occupancy Types):
If the lender identifies rental income from the property, the loan is eligible for delivery as a second home as long as the income is not used for qualifying purposes, and all other requirements for second homes are met (including the occupancy requirement above).
The "other requirements" include: you must occupy the property for some portion of the year; the property is not subject to any agreements that give a management firm control over occupancy; and other requirements mentioned above.
The above guideline is in the context of a refinance (not a purchase) because rental income would be identified on tax returns in reference to a property already owned. However, that implies that short-term rentals (as one might do through AirbnB) do not automatically violate the status as a secondary residence, in the eyes of Fannie Mae, if the owner truly occupies it part-time.
However, short-term rentals certainly invite more scrutiny. In spite of the above guideline, many lenders will not refinance a property as a secondary residence under any circumstances if any rental income is identified on the tax returns. This is due to policies related occupancy fraud risk, high levels of scrutiny, and abundance of caution.
Q. How do people "get caught" for occupancy fraud?
A. Most people who attempt to misclassify their occupancy status get screened out in the application and underwriting process. We truly do not want to work with anyone trying to skirt the truth regarding their occupancy status because it can also cause severe consequences for us as a mortgage lender.
Sometimes people think, "why would anyone every care about my loan if I'm paying it?" Your loan may be audited secondary market reasons that have nothing to do with you as an individual. There are several ways people get caught for occupancy fraud. Here are just a few of them --
Suspicious Activity Report (SARS). During your loan origination process, lenders are required to report suspicious activity to the Federal government through certain procedures. These reports are made confidentially to the government, typically without interruption of the loan process. Lenders are prohibited from informing the borrower when a SARS report is made. In other words, a loan will typically close when a SARS report is made, and a borrower may only find out about it long after in the course of an investigation.
Internal lender audit. Lenders periodically audit loans they've already closed.
Secondary market audit. After your closing, audits happen in a few ways. Many loans get sold from lender to lender. Lenders who purchase mortgages often audit them in order to manage risk and test the integrity of portfolios they've purchased from another lender. If any fraud is found in the file, they can force the original lender to repurchase the loan at a significant loss. Secondly, the agencies that back mortgages, Fannie Mae and Freddie Mac, periodically audit files. They can also remove their backing and force the originating lender to purchase the loan at a significant loss.
Subsequent loan applications. Sometimes people will apply for a new primary residence mortgage shortly after purchasing a previously property also supposedly purchased as a primary residence.
IRS Investigations. According to the IRS website, "the Internal Revenue Service is playing a key role in the fight against real estate fraud." In the course of its audits, certain red flags may prompt the IRS to subpoena loan records. This can be done especially to bolster tax fraud charges by illustrating a pattern of fraud.
Criminal investigations. In the course of any investigation, especially one investigating fraud or financial crimes, investigators may subpoena loan records. According to media reports, this happened recently in the high profile case of Special Counsel Robert Mueller's investigation of President Trump associate, Paul Manafort. Several charges against Manafort relate to allegations of fraudulent statements on his mortgage applications -- even though those were not the initial allegations that prompted investigation.
Routine loan servicing. There are several processes that happen in the course of servicing a loan that may raise a red flag regarding the borrower's occupancy a property. This can prompt investigation into the accuracy of the occupancy status listed on the loan application.
The bottom line is, don't mess with occupancy status!
If you want to purchase an investment property, you'll need to properly disclose it as an investment property.
Keep mind owner occupancy requires one-year occupancy. If you want to avoid the investment property limitations and you don't already own a home, consider occupying the home for one year.
What's My Next Step?
If you plan to buy a secondary residence or investment property within the next three months, the clock is already ticking! Please get in touch with us through our Get Started Online portal.
If you plan to buy further than three months into the future (or if you're purchasing a home outside Wisconsin), please use one of the contact forms below.
I'm beyond three months away from buying, but I'd love to talk! Please help me plan and prepare!
I'm outside of WI, but I enjoy your guides! Please put me in touch with a colleague who serves my area!