Primary Home Versus Second Home Purchase Mortgage Guidelines

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This BLOG On Primary Home Versus Second Home Purchase Mortgage Guidelines Was UPDATED And PUBLISHED On January 23rd, 2020

Primary Home
Gustan Cho Associates

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

In this article, we will cover and discuss Primary Home Versus Second Home Purchase Mortgage Guidelines.

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’s 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, let’s 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 upsizing 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

Which means moving to a larger home

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

  • However, if the homeowner were to move into 1,700 square feet home from a 1,500 square feet home, it does not make sense
  • On cases like these where the 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 the 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 the buyer can possibly purchase it as a second home
  • Second homes and/or vacation home requires a 10% down payment on the 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 a homebuyer is 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, let’s take a case study:

    • currently living in a 5,000 square feet home
    • want to purchase a 2,000 square foot townhome
    • reason for downsizing is due to children grew up and moved out of home
    • Or a family with a single-family home is planning on selling the large home and move to a condo and/or townhome

This case scenario will definitely qualify for a primary owner-occupied mortgage loan on the second home purchase because the deal makes sense.

Property Tax Home Exemption On Primary Home

In most counties in the U.S., homeowners can get a discounted property tax on their primary home. The state, county, and/or city will not let you know that you qualify for a property tax home exemption. Homeowners would need to do the research and apply for property tax exemptions in the area of their primary home location. Most municipalities have informational websites that inform property owners of their exemption rights. Owner-occupant homeowners normally pay less in property taxes if they utilize the home exemption on their owner-occupant home.

According to Alex Carlucci, a property tax home exemption expert at Gustan Cho Associates:

Homestead exemptions keep you from paying tax on a portion of your home value. For example, in Alaska, homeowners who are 65 or older don’t pay taxes on the first $150,000 of assessed value for a primary residence. Some states tie the homestead exemption to income level or other criteria. Each area has its own rules and deadlines for applying. Some require you re-apply each year. Many states offer property tax exemptions to older homeowners and the disabled. Colorado exempts 50% of the first $200,000 of the actual value of your home for seniors and disabled veterans. There are age, income, and residency restrictions, so it’s smart to read the fine print. A homestead exemption aimed at seniors may only defer property taxes until the home is sold. And don’t assume exemptions for seniors kick in at 65. Washington state reduces property taxes for homeowners the year after they’re 61. Nashua, N.H., increases the amount of the senior exemption as you age. When you turn 65, you get a $192,000 exemption. That increases to $224,000 when you turn 75, and $280,000 when you turn 80.​ You’ll need to show proof of disability, like eligibility for Social Security disability benefits, to get a property tax exemption.

Michael Gracz, a senior loan officer at Gustan Cho Associates and VA loan expert, said the following about homeowner’s property tax exemption on VA loans:

Many states offer property tax exemptions to veterans if they: Use the home as their primary residence, Served during wartime, Were honorably discharged. Some states offer property tax exemptions to all veterans, even those who served during peacetime. Others, like Pennsylvania, target disabled vets.. You may need to meet other requirements, like the length of residency or income restrictions. Parents and widows of disabled service members may also get property tax exemptions.

Both Properties Will Be Calculated Towards Debt To Income Qualification

Why both properties will be calculated to classify the debt as income

Home Buyers qualifying 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 Used As A Primary Home

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 the 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 the 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 the home
  • If the homeowner does not have a 75% loan to value on exiting the 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 the original property to an investment home, the distance rule to employment is exempt

Home Buyers who need to qualify for a mortgage with a direct lender with no mortgage overlays, please contact us at Gustan Cho Associates 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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