Primary, Second Home or Investment property?

15 Replies

Hi all, I would appreciate any guidance on my situation.

Last year My brother and I co-bought a house for my family to live at iin CA, since then ive relocated to TX and I am currently renting an apt. I didn’t actually live in that house.

I am looking to buy my own property in Houston towards the end of the year (2021) and I am wondering what my options are. I have about 20% saved up of a property within my budget and I am looking at possibly using it as an investment property down the line.

Woud it be considered a Primary Residence since it truly would be my first primary residence? Or a second home because it is the second House I buy/own or an investment property because I plan to invest it later?

Which Home Type would be the best and most honest step moving forward to avoid paying a higher downpayment and less interest rate?

I would appreciate any input. Thanks!

@Farah Arabi

One thing to add is that ideally I’d want to use it as an investment ASAP but I am willing to live there for a bit if I have to inorder get a lower interest rate and pay less of a downpayment.

@Farah A. good question, the house in CA if you moved out due to moving out of state then rented it out is okay. At that point it's your investment property and as long as it's financed with conventional loan you can use that as a rental on your next qualification for the loan in TX. 

You can buy that home in TX as a first time home buyer 5% conventional etc. and save other money for a rental down the loan. A couple things you'll need, a rental lease for the one in CA, more reserves for the next home you will buy because now you will be buying that home and have a rental. 

The big reason people wait a longer time to do this is because the tax savings by waiting the two years in that primary then selling it to move to the next one. There are a lot of investors that build their portfolios by buying one investment, living in it, buying another one and consistently growing it like that which is a good strategy. 

@Peter Mckernan

@Peter Mckernan u

Hi Peter, thank you for your reply!

Just to clarify a few things: I used a conventional loan to buy the house in CA with my brother. We bought it in August 2020. My elderly parents continue to live in the house in CA however, my brother and I cover the mortgage payments. I don’t intend to rent it out soon as they occupy it, but definitely something to consider down the line.

Follow up questions:

Considering the CA house situation, would then the new property to be purchased in TX be regarded as my Primary Residence if I plan to live there for a year or so?

To reiterate, your recommendation is to start out with a smaller downpayment for a conventional loan for the TX property and save up the rest of my funds for a future rental investment as a downpayment will be costlier for that future rental property considering it would be my 3rd property?

Thanks in advance!

@Farah A. since you never lived in the CA property, that was never your primary residence and you never owner occupied it. The loan for that property should not be an owner-occupied loan. If you took out the CA loan as low down payment / owner occupied, that would be a problem when trying to get another loan less than a year later. In that situation, you and your brother made false claims on a legal document and it would be considered mortgage fraud. Hopefully that is not the situation.

Assuming you purchased the house in CA as non-owner occupied, then you are free to get an owner occupied loan in Texas.

@Joe Splitrock

Hi Joe, thanks for the reply.

Okay, that makes sense. I know I am well within the legal terms of my first mortgage loan.

So, there would be no need for an investment property loan on a new TX property if I will be living there for however many years the new loan dictates? And having roommates would be acceptable?

Thanks!

Originally posted by @Farah A. :

@Joe Splitrock

Hi Joe, thanks for the reply.

Okay, that makes sense. I know I am well within the legal terms of my first mortgage loan.

So, there would be no need for an investment property loan on a new TX property if I will be living there for however many years the new loan dictates? And having roommates would be acceptable?

Thanks!

If we are talking conventional financing, you generally need to owner occupy for a year. That is why I was asking if the loan you took out in August 2020 was under owner occupied terms. If it was owner occupied, I would wait until after August to buy a property, just to avoid problems. If you are going to live in the property, it is owner occupied. Living in the property means sleeping there, getting mail there, having your drivers license address there and tax address there. Having roommates is fine. At the end of a year you can move out and keep it as a rental. Then you can take out another owner occupied conventional loan on a new property if you move to the new property. 

@Joe Splitrock hit the nail on the head. @Farah A. you'll need that place for a year, then make the move. For the rental lease, I understand that you are just covering the payment for your family. You are fairly close to August, so just a little longer to be in a position to do that purchase. 

Primary loans of course can be less down depending on DTI and other background info that the lender can check. Then going for a rental/investment it's 20% or more, and now with Fannie and Freddie change the down payments for investments maybe changing on secondary/investment homes.

@Farah A. Previous posts provide some great info! I just wanted to add, for investment properties a lot of lenders have increased down payment to 25% to 40% depending on the lender also type of loan (eg, whether it's above conforming limit or not). This is a bit of a special "covid time" underwriting requirement and no one knows how long it will last.

@Farah A. if I read your post correctly you and your brother paid for a house whereby your elderly parents live as their primary home. And furthermore you and your brother continue to pay for the mortgage, which suggests to me that your elderly parents could not have qualified for purchasing the home on their own; and thus why you purchases it for them as “their” primary home, correct? 

And if is then you have no reason to worry about buying your own primary home in TX with less down payment as long as you can qualify to carry both houses.

It sounds to me like you took advantage of a less known Fannie Mae’s Family Opportunity Mortgage whereby you & your brother purchased the home for the benefit of your elderly parents to occupy since they don’t qualify on their own. Parents can do the same for their kids. 

So no need to wait. Make sure that you live in the new house for at least 12 months after you settle. 

Make sure that your income supports  with both houses and other debts that you have. Also a written explanation about the house in CA, your current living situation, your interest, and intent for the new home that will occupy should help your loan officer put your loan together. 

Good luck.


Originally posted by @Yue Lehman :

@Farah A. Previous posts provide some great info! I just wanted to add, for investment properties a lot of lenders have increased down payment to 25% to 40% depending on the lender also type of loan (eg, whether it's above conforming limit or not). This is a bit of a special "covid time" underwriting requirement and no one knows how long it will last.

 Is this something you encountered recently on the 40%? I ask because Fannie Mae recently placed limits on investor and second home loans. They are trying to limit the number of these loans that are issued, which most people believed would translate to rate increases. Can you share some details on where you saw the 40% requirement? Was it your lender and where were the properties located?

@Yue Lehman did you buy the home in CA with your brother as “owner occupied?” How much did you put down on it and how long exactly have you owned it?

A conventional owner occupied home loan requires a minimum of 12 months of owner occupancy. There can be insinuating circumstances that can justify not occupying the property such as a job transfer or a life changing circumstance, but technically the bank requires you to occupy it when you say you’re getting an owner occupied loan.

The same will go for your property in Texas. If you have the 20% down you should buy owner occupied and then you should get a lower rate. Live in it for the required amount of time (12months) normally, and then rent it out. There are lots of variables but that’s the most simplistic. Also if you’re buying owner occupied you can always put less down like 5-15% to leverage your money better if the cash flow still makes sense from the rents down the road. Then you’ll have the additional funds to do the same thing again next year and again and again. as you build your portfolio.

@Paul Defngin has the right answer here.  It's 100% legitimate to buy a home for elderly parents who cannot qualify on their own and have it be considered a primary residence.  If you and your brother talked about that with your loan officer, it's very possible the loan was underwritten that way.  Going forward, you can buy your own primary residence, as long as you qualify for both payments.  If your brother makes 100% of the payments, you would need to show proof of him paying the loan for 12 months to exclude the payment.  

A "second home" is a vacation home, or 2nd residence away from your primary residence.  It should not be confused with the second home you purchase, which could be either a new primary residence, a vacation home, or a rental property.