Second home loan or investment property loan?

Question

Hey, y'all!David here. Going through my options for a property in Maine that we intend to use as a STR. I want to make sure I tie my shoes tight and stand up real straight and be above water here — I want to do everything right.I've been presented with the possibility of financing this property by using a second home loan (10% down instead of 15-25%), and it's appealing to keep liquid. I have no problems with hanging out at my second home for 14 days and my potential mortgage lender assures me that it's on the up-and-up. What am I missing? Tax implications? Forms to fill out? Blindsided by mortgage fraud letters in the mail?There are some forums on here that debate the different requirements by different lenders on what qualifies as a second home loan v. investment property, but at the end of the day — if the only real difference is that I can save 10% and have to hang out at a beautiful AirBNB for two weeks, I'm all in!Any intel would be greatly appreciated! Here's to bigger pockets.

Jeff Chisum · Answer

Talking to the wrong lender if they tell you rates on investment property and second home loans are the same. 10% down, lower rates, friendly towards STR. Second home is the way to go!

Dave Kush · Answer

Nothing wrong with that at all. I'm interested in doing the same thing and looked into this in the past. It's all about making sure that you are conforming with the lender requirements.

I'm sure there are a variety of opinions on it, but buying property with less money down allows you to generally increase your cash on cash return. As long as the cash flow covers it, I would generally rather put down less.

Andrew Postell · Answer

@David C Heiling there are several rules to having a formal "second" home loan....I would certainly double check with that lender to make sure they can offer such a thing right now though....but it doesn't sound like you are violating any of the rules here. You occupy the property for part of the year, you can rent it (but not the entire year...since you have to occupy it), and you can't give over the entire management of the property to something like a timeshare type of situation. So, if the lender can execute and you can fulfill your part then proceed as planned!

Jay Hurst · Answer

There is no deference between a second home and investment property anymore. That was done a away with my two years ago likely for this very reason. With STR there is a blurred line between investment and second home. The only difference's are that with a second home you can put down 10% vs having to put 15% for a single family non-owner, and if you call it a second home you cannot use any potential rental income to qualify like you would by calling it an investment property.

But, the loan level pricing adjustments are steep when you are only putting down 10%. You might consider looking at putting at least 20% down. the 10% might cost you 3 upfront points which is NOT equity but rather just one time costs. So, really when you think about you are only saving 7%, not 10% and at least that 10% is all equity.

Dan Weber · Answer

@David C Heiling my understanding is that the interest rate on the investment loan is also likely to be higher than the second home loan. Seems like a no brainer.

Second home loan or investment property loan?

Second home loan or investment property loan?

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