"Second Home Mortgage" she says. I don't own a first home???

Question

Hello good people,

I took the plunge and called a lender today. It's a Federal credit union that is next door to where I work, I figured what the heck.

Here's the long story short - I want to invest out of state, and I was told today that I should apply for a "second home mortgage", as in one for a "Vacation home" even though I don't really plan to use it for a vacation home (at least not in the too near future), and I don't have a first mortgage. I rent my 'first home'. Is this a real thing?

Here are the details:

I am currently living (and renting) in Orange County California. I've never bought a home.

I want to purchase a single family or small multi-family in the Northern Indiana or Southwest Michigan region - because that is where I am originally from. I know the area, and I have a lot of family there to help the process. Also, the numbers work.

I have 10k currently saved, and it was my plan to save perhaps 10k more in order to have 20% down and the ability to buy something up to 100k. Right now I just wanted to start talking to lenders to get my facts straight and make sure I was on the right path. I've seen a few properties that caught my eye around 50-60k also, and I know I'm close to having the down payment in that bracket.

The lender says that for investment properties, they require 25% (not that shocking) but we could apply for a "second home loan" which only required 10% down. She mentioned because my family is in the area, and because I mentioned that perhaps one day I could use the property as a vacation rental (and would be using it myself from time to time) that it qualified. I made sure she understood that I don't actually own a first home, and she said that was fine.

I also questioned:  "But, I can rent it out in the mean time? This isn't like ... illegal?" and she confirmed it was not. She noted I would just need to most likely write a letter of intent to eventually move to the property in the future...even if that might not ever happen.

I guess technically it's not really lying. That is a possibility in 30 years or something.

Well ... as I thought more it felt weird, and I came on here to do some further research. I've only seen one post and it mentioned that you must live in the second residence for X amount of time out of the year. Do these things just depend on the lender?

Any way, sorry for the long question, but any help you could share will be greatly appreciated.

Thanks kindly in advance!

Sarah Williams · Answer

@Jonna Weber @Brooke Spaulding - Thanks so much for the replies. I have been referred to a local lender through a realtor I've been talking to in my location. I haven't contacted him yet, but I was already feeling like working with "local" people would be better.

Brooke Spaulding · Answer

@Sarah Williams I just did something similar where I rent my primary residence in Boston and purchased my first home (never had a mortgage before) in Vermont. Because the distance is too far to be considered a reasonable to commute to my main income source in Boston it was treated as a second/ vacation home mortgage. I was able to get a loan for 10% down.

I agree with @Jonna Weber that working with lenders in the area you are looking to buy makes it smoother. I spoke with multiple (each state) and the local lender I selected worked out great for me. The agents were also very pleased as small things that are different per region (for me it was a spring water source) would have been a hassle to get through a MA or nationwide lender but a VT lender is used to that. Hope that helps.

Jonna Weber · Answer

@Sarah Williams - I would also highly recommend you work with a lender in the general area of where you are trying to purchase your rental.  Sellers love to see that you are working with a local lender, and it often helps things stay on track and close quicker.  I have worked with some wonderful out of state lenders, but working with someone locally  is an asset in general.

Andrew Stephens · Answer

Credit unions can sometimes have different criteria because they may be holding the loan in their portfolio instead of selling it in the secondary market. In that case they may not have the same restrictions on second homes.

Melvin List · Answer

@Don Spafford sorry for the delay.  Yes, typically second homes are reserved for SFR's

Don Spafford · Answer

@Melvin List You seem to be knowledgable on the subject. So if I were to get a second home that is a 4 plex, I can't leave one unit unrented to use as a vacation home while renting the other 3? I had planned to use this strategy to get a lower down payment assuming that as long as one of the units was kept for my personal use, then it would qualify. Is that not the case? So it can only be SFR?

Melvin List · Answer

@Sarah Williams sorry that was not supposed to be a link

Sarah Williams · Answer

@Melvin List - Ok. The link didn't open to anything (just a webpage that kept 'loading'). Very well may be my computer, it's acting strange today.

Thanks again so much for the info and the reply.

Melvin List · Answer

@Sarah Williams the information I sent you is from Fannie

Sarah Williams · Answer

@Melvin List - Thanks so much for the reply.  It doesn't surprise me that she was wrong, she kept getting Indiana and Idaho mixed up (red flag, right?)Are these rules set above the lender level - like by the government?