Can Second Home Purchase Be Primary Home?


Primary Home

A primary home is the principal residence of the homeowner.  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 and 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 and 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 second property financing as primary home financing.

Primary Home Financing On Second Properties

If you currently own an owner occupied home and get a job transfer which is beyond commuting distance, your second property will definitely qualify for another owner occupied primary residence mortgage loan.  The job transfer needs to be out of town or out of state which is beyond commuting distance.  It cannot be within a one hour commute.  The job transfer needs to be at least 60 miles away from the main home.

Distance Of Second Home Purchase

You can qualify for a primary home financing on a second property that is close by your original home if the deal makes sense.  For example, if you are currently living in a 1,500 square feet home and have a growing family and need more space, you can purchase a second property that is close by the home you are living in as long as the square footage is substantially larger.

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 you 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 you are moving to another home that is close by your original owner occupant property and the property is similar in size and value, then the only way you can purchase the second home is via an investment home mortgage loan, which requires 20% down payment.  If the property is at least 60 or more miles away, then you can possibly purchase it as a second home and/or vacation home which require a 10% down payment.  Second home financing and investment home financing can only be done with conventional mortgage loans.  FHA insured mortgage loans are only eligible for owner occupant property financing.

Down Sizing To Smaller Home

On the flip side, if you are moving from a larger home to a much smaller home due to your children being grown up and moving out of the house, you are eligible for primary home financing.  For example, if you are currently living in a 5,000 square feet home and want to purchase a 2,000 square foot townhome because your children have moved out of your home, you will definitely qualify for primary owner occupied mortgage loan on your second home purchase.

Both Properties Will Be Calculated Towards Debt To Income Qualification

If you do qualify for owner occupied financing for the second property purchase, you need to realize that both properties will be used to qualify your debt to income ratios.  Both your monthly principal, interest, property taxes, insurance payments, mortgage insurance premium payments, and other monthly housing expenses such as HOA will be used in calculating your 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 and for conventional loans, debt to income ratios are normally capped at 45% DTI.

High Debt To Income Ratio Issues On Second Property Purchase

If you are in a situation where your debt to income ratios exceed the maximum DTI allowed for your second home purchase as a primary residence, there is a solution.  You can refinance your current primary home as an investment property with 25% equity, maximum 75% loan to value, and use 75% of the potential market value rental income as additional income towards your debt to income qualification.  If you currently have at least 25% equity in your first owner occupied home, then there is no reason to refinance it as an investment property and can just get an appraisal to confirm that you in fact have at least a loan to value of 75% LTV and 25% equity in your home.  If you do not have a 75% loan to value on your first owner occupied home, you can also pay down the mortgage balance so it meets the 75% loan to value requirement after an appraisal and use 75% of the potential market rental income towards your debt to income calculation.  On the above case scenario where you are converting your original property to an investment home, the distance rule to your employment is exempt.

Gustan Cho

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