I need some clarification on how does second home loan and investment/vacation rental loan work, because I have seen that mortgage rate for second home and vacation/investment property are different.
1) What should I choose because my goal is to make it short term rental property to get some passive income?
2) Is there a way to get lower mortgage rate for rental property?
@Amit Desai I am a lender and the company I work for follows Fannie Mae guidelines with no overlays when it comes to this topic.
Fannie Mae's guidelines verbatim are as follows:
Must be occupied by the borrower for some portion of the year
Must be suitable for year round occupancy
Borrower must have exclusive control over the property
Must not be rental property or a timeshare arrangement (this has the following disclaimer in the guidelines: If the lender identifies rental income from the property, the loan is eligible for delivery as a second home as long as the income is not used for qualifying purposes, and all other requirements for second homes are met (including the occupancy requirement above).
Cannot be subject to any agreements that give a management firm control over the OCCUPANCY of the property
This means that as long as you intend to occupy the property some portion of the year, you could absolutely rent it while you are not using it. This is why it can work for short term rentals but not long term rentals.
Property Manager · San Diego, CA · Member since 2020 · 205 posts · 162 votes
6y
@Amit Desai Unfortunately, rental properties tend to have higher rates because the lender takes on more risk than someone's primary residence. You can always pay points to your lender to lower the rate. This would make sense if you planned on holding the rental property for an extended period of time. Otherwise, just factor the new rate you'd get on a rental property into your calculations. With rates so low, even rental property rates are insanely low. Great for cash flowing properties!
Finally, anytime you say a property is your primary when it is really a rental that's bad. It makes investors look bad. It makes you look bad. For the sake of your reputation and ours, I wouldn't lie to get a lower rate.
Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
6y
Hey @Amit Desai, yes if you are planning on renting it you will be in that investment load space.
Us, for example, didn't plan on renting it at all. It was a dream purchase for me and my wife, but after joining Bigger Pockets and all the great folks on here helped my move into the STR game.
We ended up with a standard 2nd home mortgage that was almost immediately transferred so we just started listing it on VRBO and AirBNB. Going on 3 years now and it has been great.
I will say that most 2nd home loans have a clause or a form you sign that say you will not rent it out. So if your intent is to rent it from the get, then you could be on the hook for fraud.
EDIT - I should say that the new mortgage servicer doesn't have the non-rental clause.
@Andy Eakes thanks a lot for clarification as I am new to this business so trying to understand all terms related to real estate. I am definitely going in legal way for sure but wanted to make sure why I understood from online search is correct or not.
My goal is to make it as short term rental just like everyone does on Airbnb, VRBO etc.
thanks a lot for clarification as I am new to this business so trying to understand all terms related to real estate. I am definitely going in legal way for sure but wanted to make sure whatever I understood from online search is correct or not.
So, I should go with investment rates.
Is there any recommendation to get good investment rates? Specially for Florida area.
Property Manager · San Diego, CA · Member since 2020 · 205 posts · 162 votes
6y
@Amit Desai No problem! With short term investing too, if you have a popular property, I would say that rates almost do not matter because you are making so much money! Thankfully we get great rates no matter what because of the circumstances surrounding rates right now. I live in San Diego and know a lot of investors making a killing with STR.
Real Estate Agent · Galveston, TX · Member since 2015 · 255 posts · 219 votes
6y
The rates are always going to be different between anything that is for personal use and anything that is considered purely investment. With most of the mortgage brokers I know, there isn't a clause saying that you cannot rent out your second home as a vacation rental as long as you are still intending to use it personally. If you were to rent it out long term, that's where you cross the line.
That being said, you have to make sure you always refer to it as a secondary or vacation home while going through underwriting. Their job is to make sure the bank is covered and takes a minimal risk. If they hear the word investment or rental, they will be pushing for things to be an investment loan to compensate. Just make sure there isn't a clause against partial rental and you will be good.
Thanks for your response and appreciate your comments.
Well, my intention is to rent it out as much as I can so I want to in that way only. I think investment rate is the only option for because of my goal. As a newbie, I don’t want to confuse my self and real estate terms becauseI like to be straightforward.
Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
6y
Rates will be lower for a 2nd home loan, but as Michael stated you will have to acknowledge in the loan docs that you will not be renting out the property.
Rental Property Investor · The Villages, FL · Member since 2017 · 341 posts · 398 votes
6y
@Amit Desai I can only speak with my experience, but when we bought our second home with the lender knowing our intention was to rent it out, the rate was lower than it would have been if it was considered an investment. When we purchased our third home, we did not qualify for the rate as a second home and had to pay the rate as an investment. Lender said we only qualified for the second home rate on the second home, after that you pay the rate for an investment.
@Amit Desai I am a lender and the company I work for follows Fannie Mae guidelines with no overlays when it comes to this topic.
Fannie Mae's guidelines verbatim are as follows:
Must be occupied by the borrower for some portion of the year
Must be suitable for year round occupancy
Borrower must have exclusive control over the property
Must not be rental property or a timeshare arrangement (this has the following disclaimer in the guidelines: If the lender identifies rental income from the property, the loan is eligible for delivery as a second home as long as the income is not used for qualifying purposes, and all other requirements for second homes are met (including the occupancy requirement above).
Cannot be subject to any agreements that give a management firm control over the OCCUPANCY of the property
This means that as long as you intend to occupy the property some portion of the year, you could absolutely rent it while you are not using it. This is why it can work for short term rentals but not long term rentals.
Investor · Member since 2019 · 59 posts · 150 votes
6y
Hi Amit,
Generally speaking, a second home needs to meet a few requirements:
1. It needs to be some distance from the primary residence. In other words, you can’t get a 2nd home in a city where you live.
2. There needs to be some justification to the lender on how you intend to use the 2nd home for your own. That said, it’s not against the rules (usually) to rent out your property when you’re not using it. As long as you communicate to your lender that you intend to use the property as your second home and then you plan to rent it when you’re not there, it should be OK. In fact, it’s even easier to justify it with short-term rentals because if you indicate that you plan to rent it out to someone long-term, that would obviously prevent you from being able to use it as a second home.
Lastly, it’s worth mentioning that some lenders will be more lenient than others. So if one lender wants to classify it as an investment property, you may still want to try it with another lender.
There are some instances you can purchase a second home in the city you live in or close to it. For example, I have a client who lives in Franklin, TN and purchased a second home downtown Nashville, TN with the intention of using it when conducting business downtown, entertaining clients, etc...
We don't often ask for explanations for second home unless there is a reason to.
You would not be able to purchase an LTR as a second home because access would be restricted and the property would be subject to an occupancy agreement limiting use.
Please be careful about listening to advice other than from a licensed loan officer. We are navigating the guidelines every day and they change constantly.
Investor · Nortnern Colorado · Member since 2020 · 170 posts · 131 votes
6y
@Amit Desai Yes. As @Parker Borofsky said, you need to speak to your lender. She's not kidding when she says things change daily! I had to change insurance policy type 18 hours before closing recently because… things change!
Here's a few things to keep in mind:
Ask a TON of questions from your lender. Ask what you should ask. Things like "I'll stay in it once in a while as I do work on it" might get you into a totally different loan. Whether you'll fund from an LLC and hold in an LLC vs. your name (all other things being equal) can change things. With some lenders, it's no loan vs. great loan. I'd highly recommend working with a lender who has worked with STRs before. In fact, I'd need some kind of AMAZING reason to pursue a loan from a lender who had not done an STR before. Work with a lender who is local to that area.
I used to think "No, we can't do that" meant "No, it cannot be done." In some cases that may be true, but more often than not, what the lender meant was "No, that's not a thing *I* can do" -- and the fact is that there may be a lender that CAN do it. So ask around.
Rates will be lower for a 2nd home loan, but as Michael stated you will have to acknowledge in the loan docs that you will not be renting out the property.
Is anyone familiar with upfront fees associated with going 10% down on a second home mortgage. Apparently it was something new that was established in 2022 where the closer you get to 25% the fees are phased out? I was told this by a lender, just looking to confirm it’s a thing. Thanks