House Hunting from a Distance - Quicken Loans Zing BlogThe type of property you’re purchasing affects both your interest rate and your eligibility for a mortgage interest deduction. There are three ways the property you’re purchasing can be classified: a primary residence, a second home or an investment property.

Primary Residence

Primary residences qualify for the lowest mortgage rates. In order for a home to qualify as your primary residence, these are some of the characteristics that must be met:

  • You must live there a majority of the year.
  • It must be a convenient distance from your place of employment.
  • You need documentation to prove your residence. You can use your voter registration, your tax return, etc.

If you plan on turning the property into an investment property within six months of closing, it must be classified this way. This could happen if you plan on having a tenant rent the property.

In addition to these criteria, the property must be occupied by the buyer within 60 days following closing. If the loan in question is originated through the VA and you’re on active duty, your spouse can satisfy the occupancy requirement.

Mortgage interest on your primary residence is deductible. If you took out your mortgage after 2006, you can also claim your mortgage insurance payments as part of the interest and deduct them.

Second Home

When purchasing a second home, you may need a higher credit score to qualify, and you might receive a higher interest rate due to increased risk for the lender. On the other hand, it may be that neither of these things happen – each situation is different. A second home has the following characteristics:

  • It must be a reasonable distance from your primary residence.
  • It must be exclusively under your control and not subject to a rental, timeshare or property management agreement.
  • You must live there at some time during the year. While someone else can live in your home other than yourself, some lenders may place limits on how long the home is occupied without you living there.
  • The property must be accessible by car year-round. Although it’s cool, your Dr. Evil-style lair that’s built into the side of a volcano and reachable only by helicopter won’t qualify as a second home.

You can even rent it out for up to two weeks and keep the income tax free. If you rent for 15 or more days, you’ll have to report the income, but you may be able to deduct certain things as a rental expense. It’s important to note that either your lender or the investor in your mortgage may place special limits on how often the property can be rented out. At Quicken Loans, the property may still be considered a second home if it’s rented out for no more than 180 days in a calendar year and you stay in the home for the greater of or 10% of the days when you would otherwise rent out the home.

Second homes also qualify for the mortgage interest tax deduction, although if you’re renting it out, you have to be careful. In order to qualify for the deduction, you have to use the home for more than 14 days or more than 10% of the days when you would normally rent it out, whichever is greater.

For example, if you rented out your home in Florida for six months between May and October (inclusive), you would still be able to classify your home as a second home for tax purposes if you stay there more than 18 days. (For convenience sake, I’m assuming six months is 180 days.) A timeshare used in this way also qualifies for the deduction.

Investment Property

If you plan on using your property exclusively for tenant rental, it must be classified as an investment property. The loans on these properties are made at a higher interest rate and require a higher credit score.

There are a few special requirements for investment property loans:

  • You may have to show a lease agreement that confirms the property is occupied by a tenant.
  • If the lease agreement gives the tenant the right to purchase the property, it must be secondary to the mortgage.
  • If the lease has expired and the tenants are now paying month to month, you have to provide a letter to that effect.

Although this gets a little complex, mortgage interest is one of several rental expenses you can deduct on your taxes. If you use the home for both rental and personal use, you must divide out the space for the purposes of expense determination. You can deduct as rental expenses any tenant room(s) and a part of the shared space that’s proportional to how much of the house is being rented out. Two common methods to base this on are the number of rooms in your home or the square footage.

To clarify this a little bit, let’s take my house as an example. I live in an 1800 square-foot ranch with eight rooms. If we were to rent out a 15 x 15 bedroom (225 square feet), you would deduct that plus 12.5% of any shared space. (225 is 12.5% of 1800.)

To save any more complex math, let’s say I rented just the bedroom with no access to elsewhere in the house and I wanted to deduct part of the mortgage interest as a rental expense. If the annual private mortgage insurance payment is $800, you can deduct $100 (12.5% of $800).

That’s all, folks! Hopefully this has helped you understand a little bit more about property classification and home mortgages. Still got questions? Contact a Home Loan Expert today!

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This Post Has 128 Comments

  1. I am currently a renter (i.e. I pay rent to a landlord) in the home I occupy in Florida. If I were to purchase a home with the intent of renting it out to a tenant, and where I remain in the house I rent now, what is that home I’d buy considered? Is it still an investment property, even though it would be the only real estate I owned?

    1. Hi Derek:

      It’s considered an investment property regardless of the fact that it’s the only real estate you own because you’re not occupying that property yourself. If you would like to go over your options, you can get started online or give one of our Home Loan Experts a call at (888) 980-6716. Hope this helps!

  2. I currently live and work in the state of Georgia.
    I am looking to purchase a home in TN around 4 hours away.
    I will keep my business open here, as I only work 3.5 days a week anyway, and stay in a friend’s basement for free while in town.
    Do you think this is a do able situation as far as qualifying for a mortgage is concerned?
    I will have around 90k after this house sells and my income wont change at all.
    Thanks!

    1. Hi Clair:

      A mortgage would be workable depending on your credit, debts and income. Location doesn’t matter from a qualification standpoint. However, you probably won’t be able to get primary residence rates because you have to be fairly close to your place of employment. It would be considered a second home. I’m going to recommend you speak to one of our Home Loan Experts at (888) 980-6716. Hope this helps!

  3. Hi,
    I found a house that I really love. I will not be married for another year or 2 but it would be perfect. Would I be able to buy it as my primary home and rent it out in the meantime?If not, would I be able to buy it, live in it/ occupy it for a year then rent it out and still have e the primary residence interest rates? Thank you!

    1. Hi Brian:

      You can’t buy it as your primary home and rent it out immediately. However, you can live there for a while and then convert the property into a rental and keep the primary rate. I’m going to suggest you speak with one of our Home Loan Experts at (888) 980-6716 to go over the way this works and what you can expect. Thanks!

  4. This question concerns home equity line of credit. We just purchased a home and also applied for a home equity line of credit. we were planning on using the HELOC to finance some improvement before moving into the home ( refinish floors, replace septic tank etc). The bank is saying unless we are already living in the home they cannot process the HELOC application and even then it will be 4-6 weeks to process it. That means we have to move our furniture into the home then the improvement become more difficult since we have to work around the furniture. Is this standard bank practice for HELOC approval?

    1. Hi Alex:

      We don’t do HELOCs. We do cash-out refinances on your primary mortgage. However, it sounds like they’ve approved you on the basis that it’s your primary residence. That makes sense because you will be living there and it gives you the best rate. However, you have to be living there before they can approve you for it. It does sound like an incredibly long time to wait for the loan approval though. I can tell you that much. If you just bought the house, we probably can’t do a refinance on your primary residence at this point, but I would look at a personal loan from our friends at RocketLoans if you’re looking to get it faster

  5. I want to purchase a condominium that I will live in but I don’t currently have an incoming. My mother will be a co-signer/co-borrower on the Mortgage loan but she will not be living in the residence. What will I need to do to get approved for this mortgage?

    1. Hi Melton:

      Your mother will have to sign the note. In addition, depending on the type of loan you get, she may or may not have to sign the title. There are other requirements that may come into play, but you can definitely have your mother cosign in order to help you qualify. I think the best next step would be to talk to one of our Home Loan Experts at (888) 980-6716. Thanks!

  6. I am renting in one state, and planning to build a home in another state for eventual retirement. I will not be renting out the future retirement dwelling, nor will I reside there (except part time, say a few weeks per year) – until retirement. What type residence is this considered and what are the mortgage/construction loan implications?

    1. It would be considered a second home. As far as your mortgage, the rate would be slightly higher because it’s not your primary home and if you were ever to get in financial trouble, you would pay on your primary residence first. Those are the mortgage implications. We don’t do construction loans, but if you find a home you want to buy, one of our Home Loan Experts could talk to you at (888) 980-6716. Hope this helps!

  7. I am planning to buy a second house and renting my first house. will i receive high mortgage rates on my secondary house?

    1. The new house you’re buying would become your primary residence, so you wouldn’t pay a higher rate on that one. In addition, as long as you’ve occupied your first house as a primary residence for at least the length of time specified in your mortgage contract, you can work with your mortgage company to convert that property to investment property (by showing them things like a signed rental agreement and/or having income to afford both mortgage payments), and your mortgage rate wouldn’t change for that either. There’s more information here.

      If you would like to look at your options for buying your new primary residence, you can get preapproved online with Rocket Mortgage or speak with one of our Home Loan Experts by calling (888) 980-6716. Hope this helps!

  8. Hi Kevin,

    In February of 2016, I purchased a home. It was the only home I owned but the mortgage broker classified it as a second home because I lived at my boyfriend’s house during the week and most weekends. The house was never rented out. I sold it in February of 2018 for a profit, and now it looks like I will have to pay capital gains even though this is the only home I owned during that time and had it for two years. Can you please confirm that I will owe capital gains? Thank you.

  9. Kevin, I very recently purchased a home (2 months ago) as a primary residence, but am now facing a relocation to chase a job opportunity. Am I allowed to rent out the home while I am away without refinancing as an investment property? I plan to keep the home long-term and still think of it as my primary residence or “home base.”

    1. Hi Andrew:

      My advice is to look in your mortgage documentation. Usually, there’s a period of time specified during which you need to occupy the home as a primary residence in order not to be in breach of contract. Once that time is up, you’re able to talk to the lender and convert the home to an investment property, but there’s a key difference here. In the conversion, you can keep paying the same rate you were when it was an investment property. I’m not a tax expert, but you can’t claim as your primary residence somewhere you don’t live the majority of the year. Also, the insurance company will consider it an investment property which comes with potentially higher rates because the house will be unoccupied when you’re looking for new renters.

      I think your next step is to look in your mortgage documentation and then talk to your lender and see what they say.

      Thanks,
      Kevin

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