Need practical advice on Second Home vs Investment Property Loan

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Need practical advice on Second Home vs Investment Property Loan

Christopher Cordero
Harrison, NJ · Member since 2018 · 9 posts · 7 votes

I am working towards my first rental property and found a property that I may be sending an offer on.  I currently own no properties, and I live and work out of NJ.  I'm looking to buy in FL.

I've talked to a handful (5+) mortgage lenders now and I'd say about half of them, including a real estate agent, suggested to me to consider calling this property a "Second Home" where in fact it is intended to be rented out.  They all explained this recommendation in the same way: that it's perfectly common for people to buy second homes in FL, especially people like me who are first-time homebuyers.  They sometimes even suggest that if I wanted to, I could just decide to live in it for a few months before moving back up to my apartment in NJ and then renting it out.

Is this a bad idea?  I think this is technically mortgage fraud, but the fact that so many people are suggesting it to me makes me think this is more commonplace than usual.  Furthermore, the difference in interest rate is pretty large - from what I've seen it's a full percentage point difference with investment property loans being greater.  Ideally, I could lock in the lower rate so that my cash flow looks better but I 100000% don't want to get in trouble or lose my property on a technicality or something.

Does anyone know how this works?  Is living in it for a few months and then later renting it out actually an option?

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Daniel Hennek
Lender · Lewis, CO · Member since 2017 · 218 posts · 159 votes
5y

Stop listening to people that don't know what the hell they are talking about!  If you declare a property owner occupied that you intend to rent out you are ABSOLUTELY committing mortgage fraud.  Second homes are considered "owner occupied".

Mortgage fraud is basically "any material representation that would induce a lender to give you a loan under certain terms when they otherwise would not".

Telling them it's second home when you actually intend to rent it out as an investment property is a material representation.  It still blows me away how many people think this crap is acceptable.  Trust your gut and how you read things, not others suggesting it's ok to misrepresent your intentions while getting a mortgage loan.

It really is THAT SIMPLE!  If your intentions are to rent it, then by signing the application declaring the subject as a "second home" and signing the second home rider and owner occupancy affidavit you'd be lying "in order to induce a lender to give you a loan on certain terms".  The terms would be different for investment as you have stated, and there is the hitch.

Google "occupancy fraud" as this is the specific type of fraud you're talking about.  The managers of those loan officers you spoke would most likely want to know that they were coaching you to commit occupancy fraud.  Those conversations can be a little tricky but MLOs should be coached on fraud of all sorts because people come at us with that crap all the time.  If your intention is to actually occupy the property for as a second home then you're fine.  It's about your intentions.  While nobody can tell you your intentions, you'll know if you commit mortgage fraud or not and have to decide if you want to flirt with the law and risk a loan officer or manager submitting a Suspicious Activity Report to FinCEN.

For context, I own a mortgage company and am my companies compliance officer so I'm not some rando spouting nonsense like the person above.  Follow this link for more information on mortgage fraud from FinCEN.

https://www.fincen.gov/resourc...

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  • Jonathan Balos
    Member since 2019 · 13 posts · 3 votes
    5y

    Hi Chris, There is no need to worry about mortgage fraud. Those lenders would not be recommending it if was. Second home is a great way to get a good rate. I believe you need to occupy it for a couple of weeks out of the year or intend to to it being considered a second home. Wish you the best!

    0Reply
  • Daniel Hennek
    Lender · Lewis, CO · Member since 2017 · 218 posts · 159 votes
    5y

    Stop listening to people that don't know what the hell they are talking about!  If you declare a property owner occupied that you intend to rent out you are ABSOLUTELY committing mortgage fraud.  Second homes are considered "owner occupied".

    Mortgage fraud is basically "any material representation that would induce a lender to give you a loan under certain terms when they otherwise would not".

    Telling them it's second home when you actually intend to rent it out as an investment property is a material representation.  It still blows me away how many people think this crap is acceptable.  Trust your gut and how you read things, not others suggesting it's ok to misrepresent your intentions while getting a mortgage loan.

    It really is THAT SIMPLE!  If your intentions are to rent it, then by signing the application declaring the subject as a "second home" and signing the second home rider and owner occupancy affidavit you'd be lying "in order to induce a lender to give you a loan on certain terms".  The terms would be different for investment as you have stated, and there is the hitch.

    Google "occupancy fraud" as this is the specific type of fraud you're talking about.  The managers of those loan officers you spoke would most likely want to know that they were coaching you to commit occupancy fraud.  Those conversations can be a little tricky but MLOs should be coached on fraud of all sorts because people come at us with that crap all the time.  If your intention is to actually occupy the property for as a second home then you're fine.  It's about your intentions.  While nobody can tell you your intentions, you'll know if you commit mortgage fraud or not and have to decide if you want to flirt with the law and risk a loan officer or manager submitting a Suspicious Activity Report to FinCEN.

    For context, I own a mortgage company and am my companies compliance officer so I'm not some rando spouting nonsense like the person above.  Follow this link for more information on mortgage fraud from FinCEN.

    https://www.fincen.gov/resourc...

    2Reply
  • Daniel Hennek
    Lender · Lewis, CO · Member since 2017 · 218 posts · 159 votes
    5y

    Furthermore, lenders will conduct audits of files at various points.  Specific people are assigned to find the cheaters.  They look for red flags and they are good at it.  It's fun for them to find the cheaters and they have lots of tricks; if it's there they'll find it.  Do you want to play that game?  You want to see if you're better than the industry at playing the game?  Be honest 100% of the time when asking for large sums of money or there could be VERY LARGE consequences.

    Losing your property is the least of your concerns when it comes to mortgage fraud.  Look up the penalties for mortgage fraud in your state, but be careful as your google search history might be used against you in a court of law...

    0Reply
  • Chris Turek
    Member since 2018 · 33 posts · 14 votes
    5y

    I have an idea for you.  Call Peapack Gladstone bank in NJ.  I’m not sure if they will loan on a property in FL but they gave me a rate that was about as good as a second home rate for a recent 2 family I purchased. 

    0Reply
  • Joe Bauder
    Member since 2019 · 10 posts · 4 votes
    5y

    Here's your guide to qualification according to Fannie Mae.  Follow these requirements and you'll know if it qualifies for a second home mortgage.  You should be able to live in it for "some portion of the year" and rent out the remaining rooms as "rooms in a house" but you'd actually have to occupy it for "some portion of the year" but with the vague requirements from Fannie your lender could give you better guidance on that:

    Second Home Properties

    The table below provides the requirements for second home properties.

    ✓Second Home Requirements
    must be occupied by the borrower for some portion of the year
    is restricted to one-unit dwellings
    must be suitable for year-round occupancy
    the borrower must have exclusive control over the property
    must not be rental property or a timeshare arrangement1
    cannot be subject to any agreements that give a management firm control over the occupancy of the property




    https://selling-guide.fanniema...

    0Reply
  • Alecia LovelessPro Member
    Member since 2019 · 3k+ posts · 2k+ votes
    5y

    @Christopher Cordero I just locked in a rate of 3.5 for an investment property yesterday which obviously is higher than the current rate for single family which I heard has dropped around 2.67 and probably higher than second home rate which I do not know. I don’t think it’s terrible although it could have probably been better had I shopped around more. It was a local bank that will not be selling my loan and I regularly do business with them so I was ok with this rate. You might do better with your 5 bankers.

    Unless you actually plan on using the home several weeks/months a year I wouldn’t do the second home loan myself.

    0Reply
  • Daniel Hennek
    Lender · Lewis, CO · Member since 2017 · 218 posts · 159 votes
    5y
    Originally posted by @Joe Bauder:

    Here's your guide to qualification according to Fannie Mae.  Follow these requirements and you'll know if it qualifies for a second home mortgage.  You should be able to live in it for "some portion of the year" and rent out the remaining rooms as "rooms in a house" but you'd actually have to occupy it for "some portion of the year" but with the vague requirements from Fannie your lender could give you better guidance on that:

    Second Home Properties

    The table below provides the requirements for second home properties.

    ✓Second Home Requirements
    must be occupied by the borrower for some portion of the year
    is restricted to one-unit dwellings
    must be suitable for year-round occupancy
    the borrower must have exclusive control over the property
    must not be rental property or a timeshare arrangement1
    cannot be subject to any agreements that give a management firm control over the occupancy of the property




    https://selling-guide.fanniema...

    Quoting a very small portion of the selling guide does not mean you've shared exhaustive guidance and a fully informed opinion on the subject.  You probably should not be trying to interpret regulations or guidelines for people and telling them "by following that guidance they will know if it qualifies" because that's not everything to consider here and we're talking about high stakes with regards to mortgage fraud.  If you don't know the subject inside and out you should not be giving "answers" here to confuse people who will read this in the future.

    Furthermore, you don't really need GSE guidance on this one because its a simple concept and goes way above and beyond just one GSE's selling guide.  A borrower is either lying or not.  

    Just tell the truth and you don't have to worry about guidelines whether it's GSE guidelines or some private bank loan of any kind.  This is all about trying to game the system and get a better rate and if you lie to get a better rate you've committed fraud.  The lender(whoever they are) is going to ask you a variety of questions.  You are going to answer those questions.  Simple.  Lie = Fraud, Truth = good.  If the MLO is coaching you to call this a second home when you are in fact intending on renting it out right away then that MLO should be reported to their regulator so they stop advising people to commit crimes...They should also be reported to their manager and the situation referred to the company compliance officer.

    Many people think it's just a small lie or something that doesn't matter.  If it didn't matter the lender wouldn't give you a higher rate and people wouldn't be trying to game the system.  Just tell the truth and you have nothing to worry about.  In this case the borrower is wondering why multiple MLOs would be coaching towards a second home and the answer is simple.  Most MLOs really suck at their jobs and understanding all the implications involved in any scenario is not something they generally care about.

    Again, I am my companies compliance officer.  I've written and compiled over 200 pages of company policies and procedures covering all regulatory issues associated with a mortgage company.  Compliance Officer means compliance with regulations, and laws.  That would make me a current industry expert on the subject.  

    So, just to reiterate.  Lying is risky, truth is not.

    1Reply
  • Joe Bauder
    Member since 2019 · 10 posts · 4 votes
    5y

    Thanks @Daniel Hennek - updated my post based on your comment, and you’re right.  I was trying to direct OP to the actual guidelines to discuss with his lender, and any “advice” of mine is only as good as the average internet comment, which is to say not good at all, not an expert in the field.

    0Reply
  • Colleen F.Pro Member
    Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
    5y

    Our experience was that if you intend to occupy for some portion of the year and rent it out it was still valid to say second home.  Not sure if that is still true, it has been awhile.
    Consider if you say second home they consider  your income not property income for the mortgage.     In no case if it is a rental should you say primary residence, owner occupied. 

    0Reply
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