Second Home vs. Investment Property: Mortgage Requirements and Rates

June 7, 2021 | 2 min read | Owning a home
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There are several differences between a second home vs. an investment property. When you buy a house and apply for a mortgage, the mortgage company will evaluate whether the property is classified as a primary residence, second home, or investment property. The mortgage terms and requirements may vary depending on the classified subject property. 

What is a Second Home?

A second home is a property purchased with the intention of living in it for part of the year.

What is an Investment Property?

An investment property is purchased to rent it out to generate and collect rental income from tenants.

Second Home vs. Investment Property: Different Mortgage Requirements

The following outlines some of the different mortgage requirements you may expect when purchasing a second home or investment property. 

  • Occupancy requirements
    A property is considered a second home if the borrower ever intends to occupy the property for pleasure, whether for three months or nine months. A second home cannot be rented out or used as a timeshare. On the other hand, a property is considered an investment property if it is rented out to tenants and the borrower collects rental income. The property will be owned but not occupied by the borrower. 
  • Location requirements
    Typically, a second home must be located at least 50 miles away from your primary residence, whereas an investment property must be located within 50 miles of your primary residence. 
  • Down payment requirements
    In general, the down payment requirements for second homes and investment properties are higher than that of a primary residence. However, you may be required to have a larger down payment for an investment property than a second home. This is because investment properties are deemed riskier than second homes. After all, the borrower may rely on tenants’ income to help cover the mortgage payments. However, the required down payment may vary based on the mortgage lender’s estimated risk. The minimum down payment amount is typically 20% of the purchase price. 
  • Credit requirements
    Having a good credit score is especially important when applying for these types of mortgages. The mortgage lender will want to see that you have a lower debt-to-income ratio and have successfully managed past debts to prove you to be a reliable and responsible borrower. 

What are the Mortgage Requirements for a Second Home vs. Investment Property?

Mortgage rates for second homes and investment properties may be slightly higher than those for primary residences, as lending on these properties is deemed a little riskier. Although mortgage rates are still at all-time lows, rates fluctuate daily, so contact us to learn more about today’s rates. 

Second Home vs. Investment Property: Which is Right for You?

The best way to classify whether a second home or investment property is right for you is to determine how you intend to occupy the property. Are you looking for a vacation home, or are you looking to earn passive rental income? It is best for both second homes and investment properties to create a wants and needs list and familiarize yourself with our house hunting tips to help you narrow down your search.

From there, you can get in touch with one of our mortgage specialists to determine which financing solution is right for you.