New to Real Estate · MI · Member since 2021 · 15 posts · 4 votes
I am in the 11th hour leading up to clear to close. My bank just sent me an email telling me that the underwriter wants me to sign and date something that says I will not use this property as an investment property. We are using this property as a second home and a vacation property, but still want to AirBnB to help offset cost of mortgage and repairs. Will I be committing fraud if I state that I will not use as "Investment property" and then list it on AirBnB?
11th hour is tough, but I would find another lender if possible. Some seem very hardcore about this, others are very easy with it. I've never had a problem doing my mortgages as a vacation home. I use them for a few weeks to a month or two a year and do STR the rest of the time. Never had an issue.
Not a tax advisor or CPA. Believe key item is how much you were planning to use it a investment property vs second home.
Believe The IRS defines a second home as a property you live in for more than 14 days per year or 10% of the total days you rent it to others. If that’s the case you should put it down as investment property and will have potentially higher mortgage rate.
My understanding is that is a common form for mortgages for second homes.
Hey, as Joe mentioned above I would ask the lender to please provide in writing what they consider an investment property, that way you can avoid getting yourself involved in mortgage fraud. Usually, the rules state a second home is a property you stay in at least 14 days out of the year.
The takeaway is exactly what some of you have suggested, "Define investment Property" Thanks @Joe C. and @Keyla Rosario and @Dave Stokley I spoke with my lender and here is a little more info that might be helpful for other that read this discussion.
First off, they explained that they needed this because I was applying for a 2nd home and was only paying 10% down and that triggered PMI. So I now have options, either pay more to avoid the PMI or sign a document.
About the PMI, I weighed the plusses and minuses of paying PMI short term vs. paying 20% down. I have enough to pay the 20% to avoid PMI, but being that it is winter, speculation of the market being so unpredictable, etc. I decided that 10% and retaining cash was a better decision than suffering a relatively small PMI expense.
So, now back to the definition of "Investment property"
TL;DR - lender is helping me to write the letter in a way that prevents fraud AND allows me STR options
Here is the definition that was sent to me from my lender regarding the definition: source Freddie Mac second Home Mortgage guidelines
The Borrower must occupy the second home for some portion of the year
The Borrower must keep the property available primarily (i.e., more than half of the calendar year) for the Borrower's personal use and enjoyment
The Borrower may rent the property on a short-term basis provided that the property is not subject to any rental pools or agreements that require the Borrower to rent the property, give a management company or entity control over the occupancy of the property or involve revenue sharing between any owners and the developer or another party
The Borrower must keep the property available primarily (i.e., more than half of the calendar year) for the Borrower's personal use and enjoyment
How could you meet this criteria if you are using it as an str? Keeping it “available” for personal use 1/2 the would prohibit str during that time unless I’m reading it wrong.
The Borrower may rent the property on a short-term basis provided that the property is not subject to any rental pools or agreements that require the Borrower to rent the property, give a management company or entity control over the occupancy of the property or involve revenue sharing between any owners and the developer or another party
So, you wouldn’t be able to have a management company manage your property according to this requirement? You would have to self-manage?
This is great learning!!!
If you meet this criteria then it would be considered a vacation home vs an investment property, correct?
I’m curious what the difference in mortgage rate between investment vs vacation home.
Also, do mortgage companies require pmi across the board when you are putting 10% down?
I apologize for the list of questions… just attempting to understand the behind the scene processes that lead to a purchase with vacation vs investment home.
hey @Jeff Gold Thanks for jumping int he discussion.
I am not sure how to interpret the Freddie Mac guidelines from a legal standpoint, I can only tell you what my lender told me. That said, they told me that the condition to have it "available" is in there to prevent long term renters, even 6 months or seasonal long term. We qualify for "available" when we list to ABnB or VRBO because we can pull our listing whenever we want and so therefore it remains "available", at least that's how he explained it.
We will be self managing this anyway, at least for the first few years as this truly is a vacation / second home for us. That said, we could hire a management company to manage on our terms, but could not rent rental rights to them. They can clean, maintain, and assist with listings, but they cannot re-rent the property.
Yes, our bank is lending to us as a second home, not investment because we meet the criteria. The mortgage from this lender for investment property would have been 4.25% but as second home it is 3.25%
As far as I understand, PMI is applied to homes until you own 20% of the property and the PMI "falls off"
@Jason Wiser I appreciate you walking me though that.
Saving that 1% is a big deal. What the formula used to determine pmi? I’ve always paid bigger downstroke so never had to worry about this but I prefer to pay pmi if it makes sense and keep extra cash on hand for other deals.
Jason, what COC return are you looking for with this investment?
@Jeff Gold Yeah 1% is a pretty big deal for the mortgage but more exciting is the ability to get the property for only 10% down. We are looking at only about an 7% COC, but at this time... cashflow is very hard to find in our area, so $379 / mo cashflow on a second home, with a positive COC is good. And also, I love this property and will have a lot of fun for our family on the lake, it will teach us how to do ABnB better, and we will also be a blend of BRRRR meaning we are living in it, renting it at low cost for ABnB, and remodeling it as we go. So... we are excited!
@Jason Wiser I think it’s great that you have turned this into a family experience and are remembering the fun part of investing. You are looking to grow your asset and grow your str skills as well. It can cost a good amount of dough to get an str up and running.
We did a lot of modifications to our place and also had to our in all new furniture and some appliances. It can add up!