How To Finance a Second Home: Tricky, Little Complicated, But Not Imposible

Cinnamon Shore

This may be a great time to BUY a second home, but are banks, who make it hard enough to finance your primary residence, cooperating? The answer is yes, if you have good credit and a hefty down payment. But I have heard so many conflicting stories on the nuances of getting a second home loan, I decided to consult broker extraordinaire Marcus McCue of Guardian Mortgage. Is it true, for example,  that the home has to be a certain distance away, and that some banks would rather eat a Listeria-laced cantaloupe than make a second home loan. Raw land? Impossible,  Wells Fargo told me — too many underwater mortgages. So I needed to bring in the big gun, aka Marcus. He tells us the biggest challenge is defining just what a second home is. Here’s a secret: even Real Estate agents get confused:

It seems obvious what it means when you tell your REALTOR® or lender you’re buying a second home, right? If only that were true! Many surprised homebuyers have gotten part-way through the loan process and been denied before they discovered that their home cannot be categorized as a second home and cannot be financed as a second home due to the occupancy requirements for second homes.

1. The second home must be located a reasonable distance away from the borrower’s principal residence.

What is a “reasonable distance” can be up to interpretation. For example, if the property is a lake house or beach house, the property may be located less than an hour away from the borrower’s primary residence and still be acceptable to the underwriter as a second home. However, if you live in Dallas and are buying a second home in McKinney, the originator or their underwriter is likely to deny the loan as a second home and will require the loan to be processed and closed as an investment property.

2. It must be occupied by the borrower for some portion of the year

If the property is a second home, then this means the property will be occupied by the borrower for some portion of the year. This could be seasonal for those properties located in ski or beach areas, numerous times per month like weekend visits to a lake house, or periodically during the year like a home grandparents purchase near their grandchildren.

3. Financing is restricted to one-unit properties only

A duplex or other multi-unit property is categorized an investment property by conventional guidelines even if you live in it part of the year. The owner would be occupying only one of those units – with the other units leased to tenants – the financing on the entire property would be categorized as an investment.

4. The property must be suitable for year-round occupancy

A property that is only functional in one season like a hunting cabin with no heat will be denied.

5. The borrower must have exclusive control of the property (no timeshare or split ownership situations)

6. The property must not be a rental property or a timeshare arrangement

7. The property cannot be subject to any agreements that give a management firm control over the occupancy of the property.

Basically, see point #6. If you have an agreement where a management firm controls the occupancy, then the borrower does not have exclusive control of the property and the property is likely to be rented to tenants during the year.

Question: Does this mean you can never rent out your beach house?

The issue here is intent. The intent at the time of closing needs to be that the property will be owner-occupied and not rented. If the property is rented after closing or years later, but the borrower occupies the property themselves at some time of each year, then the loan is not fraudulent.

Question: What if you want to buy a house for your child to live in while in college?

In this scenario, the property is an investment property and not a second home. Your children are not you … so if they occupy it is not owner-occupied. There are very limited and specific scenarios where properties can be financed for family members as owner-occupied properties, but these are limited to disabled children and elderly parent situations.

If a parent is buying a property in a college town because their child is attending the college, then their intent needs to be that they will be occupying this property themselves when they visit the child in college: Not that the child will live as the occupant and they will have a room to stay in during visits.

Question: If you’ve determined that your home is not a second home, what are your financing options?

The options are primary residence, second home or investment property. If a property is not your primary residence and not a second home, then the only other option is investment property. Both primary residence and second home properties are in the “owner occupied” category. If the property is not owner occupied, then it is investment. Investment properties generally require more of a down payment and do not qualify for the same tax benefits as an owner-occupied home.

If you have additional questions about your particular mortgage financing situation, feel free to contact Marcus McCue at (214) 473-7944, or find him on Facebook. Or email me and I’ll hook you up!

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