Financing the acquire of an investment property is a little distinctive than a house mortgage. Lenders perceive that there is higher level of risk connected with second homes and properties purchased for rental revenue and eventual appreciation. Statistics indicate that individual residences are much better maintained than properties that are not permanently occupied by the owner. Certainly those who experience tough monetary setbacks are far much more most likely to dispose of investments rather than their house.
There is a considerable distinction in the regular Fannie Mae and Freddie Mac lending criteria for a second property verses a rental property. A second dwelling is defined as a property that is occupied by the owner at least thirty days every single year. Second houses are financed at lower interest rates and lower fees. This can seem like a contradiction to some because they theoretically do not generate revenue for the owner or at least not as much as a year around rental. Second dwelling financing is thought to be lower risk to the lender for a variety of factors.
The primary factor is that considering that the owner will be occupying the property for some period of time every year there is no way to project the amount of rental earnings to offset the mortgage payment. As a result, standard underwriting criteria calls for that the borrower qualify for the mortgage on their primary residence as nicely as the new second house mortgage payment and any other debt that their credit report reveals. Underwriters do not count any projected rental income into their qualifying ratios considering it is unpredictable. This is considering the owner will occupy the holiday property for some period of time each and every year. Due to the fact it have to be in excellent condition to attract short term tenants, it is most likely to be nicely maintained.
The essential distinction in qualifying for the rental property is that rental earnings is regarded as by the underwriter offsetting the mortgage payment to some degree. When the lender's appraiser inspects the property to ascertain the value connected to the loan, an analysis is made of comparable rental properties. The appraiser will figure out a "fair rental value". The underwriter deducts 25% of the projected rental value for vacancy and maintenance and the balance is credited as hypothetical revenue to offset the new mortgage payment and credited to the underwriting ratios. Basically, if the borrower qualifies for their existing mortgage, it is not a lot of a stretch to qualify for the new payment.
Whereas second residence mortgage interest rates are the same or only slightly higher than owner occupied rates, investment property rates are.5% to.75% higher with down payment specifications of 20 to 30%. This is simply the risk verses reward criteria lenders element into their investments.
Mortgage underwriters are conscious of potential deception by borrowers who reach out for the much better terms of second home financing. Other than qualifying for the new property without the benefit of future earnings, the property really should be additional than fifty miles from the borrower's primary residence and make sense as a holiday destination to qualify as a second household. The fifty mile rule takes into consideration that most investors do not buy rental properties a lengthy distance from property for the reason that they are way more tough to manage. There is typically some flexibility in these criteria, especially when there are specific circumstances such as a property to be occupied rent absolutely free by a household member such as a student or elderly parent. It is up to the buyer to convince the underwriter that it is absolutely a second household occupied by the borrower at least 30 days a year. It frequently comes down to a judgment call by the underwriter.
Lenders are suspicious of any scenario that does not meet the strict criteria of second home financing due to the fact it is challenging to monitor when or if a second residence becomes a rental property. The lender cannot stop the borrower from renting the property on a extended term lease if life circumstances modify. There is hardly ever a restriction of this nature in the mortgage note and enforcement is questionable even if there is.
Over the decades there have been numerous attempts by mortgage lenders to demand repayment or revise the interest rate on owner occupied mortgages that have turn out to be rental properties but couple of have ever resulted in litigation. It usually comes down to the "intent" of the borrower at the time of loan closing.
