Buying Primary Residence vs. Investment Property

There’s more than one type of residence on the block.

When you apply for a mortgage, you’ll be presented with options about what type of residency you’ll be purchasing. Two of those options will be “primary residence” and “investment property,” and knowing the differences between these two options is crucial when considering mortgage rates, loans and much more.

What do these two choices mean? Here’s how to tell them apart and better understand how the question of primary residence vs. investment property affects you and your bottom line.

 

Primary Residence vs. Investment Property: What's the Difference?

The major difference between these two property types lies in how you intend to use the property you’re buying. A primary residence is typically your long-term home. It’s where you live, sleep, raise your family and watch TV. An investment property might be fully capable of serving as a home, but it’s instead used as a means of generating income. The primary goal is to make money instead of making a home.

While this is the key difference between the two options, knowing how that difference affects the buying process requires diving into the details.

 

What is a Primary Residence?

A primary residence, as mentioned above, is property that you (and, where applicable, other occupants) are actively using as a home. To qualify as a primary residence, a property must serve as your home for a majority of the year and be located within a reasonable driving distance from your job. You must also begin living in the residence within 60 days of closing.

Primary Residence Mortgage Loans

Mortgages for a primary residence are typically easier to qualify for than other residency types. The mortgage rates are also often lower, with lenders seeing them as far more likely to generate consistent payments. Defaulting on your mortgage could result in you losing the residence.

Here are the types of primary residence mortgage loans you can expect to see:

• Conventional: While common, this mortgage type is strictly regulated. It will come with a 3% minimum down payment and added PMI for anything below a 20% down payment.
• FHA: This type is ideal for first-time homeowners and buyers with limited savings to draw from. It will be fully insured by the Federal Housing Agency.
• VA: Also known as a Veteran Affairs loan, this type is available exclusively to military members and usually has 0% down payment and no PMI.
• USDA: If you’re buying property in a rural area, you might qualify for a USDA loan direct from – as the name implies – the United States Department of Agriculture. This loan is part of an initiative to increase the populations of rural regions.

How Do Mortgage Rates Work for Primary Residences?

There are multiple factors that play into how your primary residence mortgage rates will shape up. These include the mortgage type you pick, your personal credit score, and who’s lending the money. You’ll also want to keep an eye on current market conditions, as they’ll have a major impact on how much you’re spending.

Are Tenants Allowed?

While it’s not unheard of for residential properties to host tenants, you’ll need to triple check multiple boxes to make sure you’re allowed to do so. Check local zoning laws and your homeowner association for rules about renting out your property. There may also be stipulations in the terms of your mortgage agreement that forbid or restrict the presence of tenants.

 

What is an Investment Property?

True to its name, an investment property is a residency that you intend to use for investment purposes. Instead of living on the property, you’re generating revenue from letting others stay or live there. This can take the form of renting, leasing, vacation homes and other options. A residency qualifies as an investment property if it’s located within 50 miles of your primary residence and has no long-term occupants living in it.

Investment Property Mortgage Loans

Investment properties are eligible for many of the same loan types as a primary residence, along with a few unique options. Given the amount of money being invested, larger Jumbo Loans might also be a possibility.

Here are the types of loans you’ll need to consider:

• Conventional: Also known as Conforming Loans, these mortgages are just as commonly used for investment properties as they are for primary residences. They’re offered by traditional lenders (banks, brokers, etc.) and – provided you have a healthy credit score – feature comparatively low interest rates.
• FHA: As with primary residences, FHA loans are a solid option for buyers with a smaller savings pool to draw from. For investors specifically, these loans are useful for establishing a multifamily property. Just be aware that you’ll need to live on the property as your primary residence for at least one year to qualify for this loan.
• VA: This veteran-specific loan option can help you establish an investment property that caters entirely to members of the armed forces and their families. The benefits include no minimum down payment and the ability to buy up to seven units on the property. However, as with an FHA loan, you must live on the property for a one-year minimum to qualify.
• HELOC: If you already own property and are looking for a dependable way to fund your next investment purchase, you might want to consider a Home Equity Line of Credit, or HELOC, mortgage loan. It allows you to funnel money out of an already-owned property for use as a down payment on another piece of real estate. This equity can be repaid monthly in a similar fashion to credit card payments.

How Do Mortgage Rates Work for Investment Properties?

Mortgages for investment properties tend to have high interest rates and down payments averaging 20% or more. Not having a consistent tenant on site to keep up with maintenance, lawn care or security means that investment properties are higher-risk investments for lenders. They’re also far more likely to generate late or unpaid mortgages, since homeowners generally choose to pay for their primary residence over one they aren’t living in.

Are Tenants Allowed?

Not only are tenants allowed to live on investment property, but their presence is crucial. Since the goal of any investment property is to generate income from residents, the system crumbles if there’s no one to live on your land. You’ll need to be proactive in finding, screening and approving top-quality tenants to ensure that your investment pays off.

 

Conclusion

To summarize, the question of primary residence vs. investment property comes down to understanding how each difference benefits you. If you’re looking to find a home for the foreseeable future, your goals should be in line with establishing a primary residence. If the mission is to generate income from your purchase, you should seek out an investment property that can be transformed into homes for others.

Whatever your goals might be, the experts at DRK are ready to help you. Our team of investment advisors will answer your questions about mortgage rates, suggest properties that will fit your needs, and help you through the buying and lending process.

Take a look at the commercial property available for lease in the Columbus, Ohio, area right here.

Until next time,

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