Primary Home Versus Second Home Purchase Mortgage Guidelines

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Primary Home Versus Second Home Purchase Mortgage Guidelines

This BLOG On Primary Home Versus Second Home Purchase Mortgage Guidelines Was UPDATED On September 6th, 2018

A primary home is the principal residence of the homeowner. Can Second Home Purchase Qualify For Primary Home Financing?

  • Primary home financing also has the best mortgage rates and mortgage terms when it comes to financing
  • A home buyer is only allowed to have one primary home mortgage loan
  • The primary home needs to be an owner occupant home
  • There are many cases where a homeowner already has a primary home but wants to purchase a new primary home
  • However, the homeowner will sell their first primary home after they move and/or rent out their original primary home
  • However, there are strict rules and regulations when it comes to qualifying second property purchase as primary home financing

Primary Home Financing On Second Properties

Home Buyers who currently own an owner occupied home and get a job transfer which is beyond commuting distance, second property will definitely qualify for another owner primary residence mortgage.

  • The job transfer needs to be out of town and/or out of state
  • It needs to be beyond commuting distance 
  • It has to be more than a one hour commute
  • The job transfer needs to be at least 100 miles away from the main home

Distance Of Second Home Purchase

Home Buyers can qualify for a primary home financing on a second property that is close to the original home if the deal makes sense.

  • For example, lets take a case scenario:
    • homeowners currently living in a 1,500 square feet home
    • have a growing family and need more space
    • They can purchase a second property that is close by the home they are living in as long as the square footage is substantially larger
    • This is up sizing to a larger home due to growing family
    • Home Buyer can go from a condo to a single family home

Moving Up To Larger Home

For example, if you were to move to a 2,500 square feet home from a 1,500 square feet home, this case scenario makes sense.

  • However, if homeowner were to move in to a 1,700 square feet home from a 1,500 square feet home, it does not make sense
  • On cases like these where home buyer is moving to another home that is close by original owner occupant property:
    • If the property is similar in size and value from the exiting home to the new home purchase
    • then the only way buyer can purchase the second property is as an investment home which requires 20% down payment
  • If the property is at least 100 or more miles away, then buyer can possibly purchase it as a second home
  • Second homes and/or vacation home requires a 10% down payment on purchase
  • Second home financing and investment home financing can only be done with conventional mortgages and not government loans
  • FHA insured mortgage loans are only eligible for owner occupant property financing

Down Sizing To Smaller Home

On the flip side, if home buyer are moving from a larger home to a much smaller home due to children being grown up and moving out of the house, buyers are eligible for primary home financing.

  • For example, lets take a case study
    • currently living in a 5,000 square feet home
    • want to purchase a 2,000 square foot town home
    • reason for down sizing is due to children grew up and moved out of home
    • Or family with a single family home is planning on selling the large home and move to a condo and/or town home
  • This case scenario will definitely qualify for primary owner occupied mortgage loan on second home purchase because the deal makes sense

Both Properties Will Be Calculated Towards Debt To Income Qualification

Home Buyers qualifying for for owner occupied financing for the second property purchase, they need to realize that both properties will be used to qualify debt to income ratios.

  • Both monthly principal, interest, property taxes, insurance payments, mortgage insurance premium payments, and other monthly housing expenses such as HOA will be used in calculating debt to income ratios
  • Debt to income ratio caps for FHA insured mortgage loans are capped at 56.9% back end and 46.9% front end
  • Conventional loans, debt to income ratios are normally capped at 45% DTI but can go as high as 50% DTI

High Debt To Income Ratio Issues On Second Property Purchase

Home Buyers in a situation where debt to income ratios exceed the maximum DTI allowed for second home purchase as a primary residence, there is a solution.

  • Buyers can refinance current primary home as an investment property with 25% equity
    • Maximum 75% loan to value
    • Use 75% of the potential market value rental income as additional income towards debt to income qualification
  • If homeowners currently have at least 25% equity in first owner occupied home, then there is no reason to refinance it as an investment property
  • They can just get an appraisal to confirm that they in fact have at least a loan to value of 75% LTV and 25% equity in home
  • If homeowner dos not have a 75% loan to value on exiting first owner occupied home, they can pay down the mortgage balance so it meets the 75% loan to value requirement after an appraisal
  • With 25% equity, they can use 75% of the potential market rental income towards debt to income calculation
  • On the above case scenario where homeowners are converting exiting original property to an investment home, the distance rule to employment is exempt

Home Buyers who need to qualify for mortgage with direct lender with no mortgage overlays, please contact us at The Gustan Cho Team at Loan Cabin Inc. at 262-716-8151 or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays. Gustan Cho Associates are also experts on non-qm loans and bank statement mortgage loans for self employed borrowers.

Gustan Cho

www.gustancho.com

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