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Different Types of Property Occupancy

Mortgage lenders are very aware of the risk they take when loaning money for home purchases. Moreover, the factors they look at aren’t limited to your income, credit score, and down payment amount. The intended use of the property you’re looking to purchase can indicate whether your mortgage is seen as a low or high risk to lenders. 

Here are the three types of property occupancies and how they can impact your mortgage rates.

[Related: Good Debt vs. Bad Debt: Considerations for Borrowing]

Principal Residence

The first type of property occupancy is a primary or principal residence. 

A principal residence is defined as a single- to four-unit family home that is where you are located for the most part. You can think of a primary residence as your main house. 

In order to declare a home a principal residence on paper and for mortgage purposes, you need to be occupying the property for the majority of each calendar year. It also needs to be your principal residence for at least the following 12 months after closing, and within 60 days of closing on the property.

Primary residences can include:

  • Single-unit family homes
  • Condominiums
  • Two- to four-unit homes
  • Houseboats

Lenders see primary residences as low-risk, and therefore they have the lowest mortgage rates. This is because lenders assume borrowers are less likely to miss payments on their main home than they would be on the home they only occupy during part of the year.

[Related: Tips for Choosing the Right Loan Terms for You]

Secondary Residence

Secondary residences are fairly self-explanatory. 

Rather than being the home you and your family occupy for the majority of the year, a secondary residency is the property you’ll call home for the rest of the year. People largely refer to secondary homes as “vacation homes,” but they can also simply be one-unit properties you visit regularly throughout the year.

Here are the Fannie Mae requirements for secondary residences:

  • The home must be occupied by the owner for part of the year.
  • Although the owner will only occupy it for part of the year, the residence should be suitable for year-round occupancy.
  • The property must only be a one-unit dwelling.
  • The residency cannot be a timeshare or rental property.
  • The owner must be in exclusive control over the home rather than a management firm.

It is also worth noting that secondary residences must be a fair enough distance away from the owner’s primary residence to be considered a logical second home.

[Related: What to Know About Second Home Mortgages]

Secondary residences are a higher risk than primary residences when it comes to lenders. Interest rates for these types of occupancies are about a quarter percent higher than primary homes. Lenders view the risk as higher because they are aware that if the financial tides turn, borrowers are going to prioritize their primary residence over secondary or investment properties. 

Investment Property

An investment property is the most unique of the three types of occupancies we are covering today, since the owners don’t use it for personal residence. 

An investment property is one that owners use in order to turn a profit. These are homes that the owner uses for a small amount of time and then rents out in order to earn a return on their investment. Investment properties can also be houses that the owner purchases and works on in order to facilitate a future resale of the property.

[Related: The Best Financing Options for House-Flipping]

This third type of occupancy also has a higher risk associated with it when it comes to your mortgage. You can expect to pay higher interest rates on real estate you buy as an investment property by about a half percent compared to the rates on your primary residence. 

One way to decrease your perceived risk is to make a larger down payment on your investment property. This might allow you to improve the interest rate on a high-risk property sale.

Seattle Mortgage Planners Can Help You Find the Best Mortgage Rates

Are you interested in finding out more about how property types can impact your home mortgage options? Do you need to know how to make the process as smooth as possible and find the best rates? Seattle Mortgage Planners is your stop for all of your mortgage and home-buying resources

Contact us today and let’s get started.

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