As a Realtor located in the resort area of the Outer Banks, I often encounter Buyers interested in obtaining financing for a home that they will NOT be living in 100% of the time. They want the best rate, which is "owner occupied". Since, I do know a decent amount about tax and have owned both a second home and a rental property I thought that I would respond to your question. Nevertheless, please note that I'm neither a CPA nor a loan officer and what follows is neither accounting nor legal advice. As others may have advised, you should probably consult with both.
It's crucial to know the difference in your lenders eyes and to be completely upfront so you avoid committing fraud. Bottom line, the property and situation needs to make sense to the underwriter. Here are some basic definitions:
Principal/Primary Residence. When a property is classified as "owner occupied" it receives a better interest rate than an investment property. It's very straight forward:
â€¢ The owner lives in the property for a majority of the year.
â€¢ The property is in a location that make sense in relation to their employment and contains characteristics that suits the needs of their immediate family.
â€¢ The borrower acknowledges (on several loan documents) they intend to occupy the property. Note: "intend" does not mean, "oops...I financed this believing I would live here and now I've decided to buy another property nearby that I'll occupy". Typically the lender wants the buyer to occupy the property within 30 days of closing.
Second Home. A second or vacation home must be a reasonable distance away from a principal residence. Typically lenders like to see a minimum of 50 miles for distance from the borrowersâ€™ home. The owner must occupy the property for some portion of the year and the property must be suitable for year round occupancy. Second home definitions can vary from lender to lender. Some will insist that a second home be in a resort area. It's generally a little tougher to qualify for a second home--borrowers are often qualifying with mortgage payments on two properties: their primary and the proposed second mortgage.
Investment Property. This is a property that the borrower does not occupy. It can also be a "second home" or vacation home that is too close to a primary residence or that the underwriter does feel strong enough that it is indeed a vacation home. As there is a higher risk to banks with investment properties, the interest rate reflects the risk (the higher the loan-to-value, the higher the rate).
Please note: Lenders will/may do post closing investigations to make sure that borrowers are actually residing in the property. If they find that the borrower is not, they may call the Note (mortgage) due...and that may be just the beginning of that person's troubles. Mortgage fraud is a very serious issue and falsely stating that one intends to occupy a property tops the list. Knowingly providing false information on a loan application is a federal crime.
In defense of most borrowers, sometimes it may seem unclear as to what type of occupancy a property qualifies for. Borrowers simply need to be upfront with their Loan Originator with the use and intentions of the property to make sure they do not commit mortgage fraud, even if it is not intentional.
I have a prepared Outer Banks Buyersâ€™ Guide which I distribute to all my potential buyers, which I can send to you via email, if you would like? It can definitely help to facilitate the buying process for an Outer Banks home/condo and it has a list of some preferred local lenders who would definitely be more than willing to answer your more specific/personal questions about financing a home/condo in the Outer Banks.
Hugh â€œScooterâ€ Willey