What Type of Residence are You Trying to Buy? How Lenders Evaluate Occupancy Types

You may be aware that your personal finances can affect your chances of being approved for a mortgage. What you may not have realized is the type of living space you’re trying to buy can have just as much, if not more, of an impact on whether you’re approved for a loan and at what rate.

Certain types of loans may only be accessible for certain types of houses, and lenders will differentiate their underwriting standards depending on the type of home and how the owner plans to use it.

What Are The Different Property Types?

A home’s intended purpose will play a role in how it’s categorized and whether it’s considered a primary residence, secondary residence, or investment property.

There are also established standards for how to categorize different types of properties, such as whether the borrower will be living in the property, the location of the property, and more.

Let’s take a closer look.

Primary Residence

A property is considered a primary residence if it meets the following criteria:

• It will be occupied by the borrower for at least six months out of the year and it will be the address of record for taxes, voter registration, etc.
• It is located within a reasonable commuting distance to the borrower’s place of employment.
• The borrower declares an intention to occupy the property as a primary residence.
• The property must be occupied by the borrower within 60 days of closing or completion.

Secondary Residence

A secondary residence is a single-family home owned by an individual, who is also the borrower, and occupied by the borrower for some portion of the year. A secondary property also has the following criteria:

• It is located at a significant distance from the borrower’s primary residential building.
• It is suitable for year-round occupancy.
• It is available for the borrower’s exclusive use and enjoyment.
• It is NOT subject to any timesharing or other shared ownership arrangement.
• It is NOT a unit in a condominium hotel.
• It is NOT subject to any rental pools or agreements that require the borrower to rent the property or give a management company control of occupancy.

Investment Property

An investment property is real estate that a borrower is planning to rent out or flip (i.e. update and sell the home) for profit. Investment properties come with their own set of standards as lenders may not just be evaluating whether the borrower will be able to make their payments, but whether the property is likely to provide returns on the investment.

Nate Johnson, a real estate expert at NeighborWho, says that an investment property may include many units and be rented out to third parties year-round.

“If the owner resides there a portion of the year,” Johnson says, “the property will be considered a second home rather than an investment property.”

Remember, however, that a second home will likely have to be a single-unit property, like a house, a unit in a townhome, or single condo. If a borrower wants a loan to purchase an apartment building or multifamily home, it won’t suddenly become a secondary residence just because the owner is planning to live in one of the units for part of the year.

How Do Different Types Of Properties Affect Mortgage Rates?

The type of property you are trying to buy can play a role in the mortgage rate you receive and the ease with which you receive a loan.

“Mortgage lenders categorize properties based on their type, size, location, and usage,” explains realtor Brady Bridges. “These categories significantly impact the mortgage approval process and the rates and requirements associated with the mortgage.”

For example, a lender may provide a lower interest rate for a primary residence because they may have more confidence in the borrower repaying the loan compared to a loan for a second mortgage or investment property.

Additionally, loans like FHA loans and VA loans, which are backed by the Federal Housing Administration and Veterans Administration, respectively, are only accessible for primary residences. These loans tend to have significantly lower rates than conventional loans with much looser down payment requirements. With this in mind, it can be easier to secure a mortgage for a primary residence than any other type, all else being equal.

What Are Some Unique Mortgage Cases?

Lenders may regard a mortgage application differently if a property hasn’t been constructed yet or is part of a condo or homeowner’s association (HOA). Let’s explore examples for a few different types of properties:

New Construction

A loan for a new construction property can work differently than a property with a home already on it.

“If a homeowner is building from the empty land, there are two stages of mortgage: one for the land and another for the home built on the land,” says real estate professional Sal Dimiceli. “A house built from scratch, also known as construction to permanent, [can have] higher mortgage rates than a regular move-in-ready property.”

Dimiceli clarifies that these rates can be higher due to the risks of construction delays or building errors.

Condo or Co-Op

If you’re considering a condo or co-op, be aware that your lender will likely require the building’s HOA to submit a condo questionnaire. Because a lender will need to rely on the condo association to handle upkeep for the property that will be used as collateral, they want to be sure it will be properly managed.

Mobile Homes

When it comes to mobile homes, it is likely that the borrower will only be leasing the land that the manufactured home will sit on. This may lead to somewhat unique mortgage situations compared to other types of houses, though it can still be eligible for an FHA loan, provided it’s a primary residence, of course.

Find Your Perfect Home

Once you know which type of home you’re planning to buy, you can ask your real estate agent and mortgage lender about the specifics for your situation. While the various types of residential properties can seem overwhelming, it’ll be worth it once you have the right mortgage for your new home.

Are you ready to get started?