The Mortgage Underwriting Process Explained - Quicken Loans Zing Blog

The type of property you want to purchase affects the mortgage interest rate you can receive. There are three potential classifications for the property: a primary residence, a secondary residence and an investment property.

Understanding each classification can help you avoid high interest rates and tax implications when purchasing additional properties.

Primary Residence

A primary residence is the main home someone inhabits. Your primary property can be an apartment, a houseboat or another form of property that you live in most of the year.

Primary residences tend to qualify for the lowest mortgage rates. For your home to qualify as your primary property, here are some of the requirements:

  • You must live there most 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, tax return, etc.

There are some aspects of a primary residence that are tax-deductible. As of 2018, homeowners can deduct mortgage interest on loans up to $750,000. This amount can include primary and secondary residences. You can also claim your mortgage insurance payments if you purchased your home after 2006. If you choose to include these deductions on your tax return, you will have to itemize your deductions instead of claiming the standard deduction.

You can classify one property as your primary residence. If you’re married, you and your spouse must claim the same property as your primary home.

In addition, once you’ve bought the property, you must occupy it within 60 days following closing. If the loan originates through the VA, and you’re on active duty, your spouse can satisfy the occupancy requirement.

If you plan to turn the property into an investment or rental property within 6 months of closing, you must classify it as an investment property.

Secondary Residence

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. Lenders will review your financials and evaluate your loan-to-value ratio, or LTV. Depending on the lender’s LTV ratio requirements, you may need to provide a large down payment.

On the other hand, neither of these things may happen – each situation is different. A second home must have the following characteristics:

  • It must be a reasonable distance from your primary residence. Generally, lenders want it to be no more than 100 miles away.
  • It must be exclusively under your control and not subject to a rental, time-share or property management agreement.
  • You must live there. While someone other than you can also live in your home, some lenders may limit how long a tenant can live there as opposed to the owner.

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.

You can 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, such as rental expenses. It’s important to note that either your lender or the investor in your mortgage may place special limits on how often you rent the property.

At Quicken Loans®, the property may qualify as a second home if it’s rented out for no more than 180 days in a calendar year. You must stay in the home for the larger part of the 180 days or for 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  out the home, you have to be careful. In order to qualify for the deduction, you must 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 6 months – or about 180 days – between May and October (inclusive), you would still be able to classify your home as a second home for tax purposes if you stayed there for more than 18 days. That would be more than 10% of the days you rented it. A time-share used in this way also qualifies for the tax deduction.

Investment Property

An investment property is a property you plan to use as a rental or to generate income. It  has the following characteristics:

  • The property can be a condo, house or a multi- or single unit.
  • It typically requires a large down payment and more LTV restrictions.
  • Mortgage rates tend to be a lot higher than for other properties, due to the higher risk the lender must take on.

Investment properties can be the most challenging properties to finance.  Guidelines for approving an investment property loan can vary by lender. It’s important to compare all your mortgage options and identify the best lender for your loan.

You must report all income generated from your rental property on your tax return. The owner may also deduct expenses such as the cost of materials to maintain the property, interest and taxes.

How to Convert a Property to Your Primary Residence

You may assume that to change your primary residence, you can simply move into your investment property or secondary home and call it a day, but that’s not the case. With the tax advantages that primary properties offer, the IRS wants to make sure to get a cut. If you decide you would like to move into your investment property, know that many property owners choose to complete a 1031 exchange.

A 1031 exchange allows rental property owners to purchase another rental property with the proceeds from the sale of a previous rental. Essentially, this is exchanging one rental for another.

This helps the owner minimize capital gains taxes and depreciation rapture taxes. To receive any gains exclusions, you must own the property for 5 years and live in it for 2. Then, the property owner can move into the property and start the process of converting the home into the primary residence.

You will need to contact your mortgage lender to see if someone is required to live in your current residence while you live in your rental. If so, you will need to find renters to use the property.

Keep in mind, if you decide not to do a 1031 exchange, you may end up paying more capital gains and depreciation taxes. It’s important to work with a tax professional to help you determine the best strategy for your situation. Converting properties can be complex. Having an expert by your side will help you avoid penalties and additional tax burdens.

The Bottom Line

If you’re considering a purchase of additional properties, make sure it makes financial sense. Work with a tax professional and a lender to determine the best direction to pursue.

Are you considering the purchase of a property for a rental? What are some of the obstacles you have encountered? We want to hear from you. Please leave your comments below.

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This Post Has 142 Comments

  1. My wife are in process of buying our first home (Townhouse – New Construction). I’m also interested in buying rental properties. Is it going to be possible to own my primary residence and buy rental properties as well or would it be better to rent and buy rental properties? On one hand, I think it’s good to build equity by owning primary residence but on the other hand I’m not going to have access to down payment I have to use on primary residence and I’m concerned if I could run into debt-to-equity ratio issues by having my primary mortgage.

    1. Hi Primo:

      If you’re concerned about not having the down payment for a primary property, it might not be good to get rental properties at this time. Rental properties require a higher down payment. In contrast on a primary property, depending on the loan program you qualify for, you can qualify with as little as 3% down. However, if the issue is whether to purchase both at the same time and you would theoretically have enough for at least a 15% down payment for a one-unit rental property, then it’s up to you. Of course, if you were to buy both around the same time, these would be factored into your DTI as you mentioned. I’m going to recommend you speak with one of our Home Loan Experts to further get into my options we have that might be best for you. You can reach them at (888) 980-6716. Hope this helps!

  2. Hi. Question for you. I’ve been in my primary residence for 3 years. I’ve been commuting 123 miles one way every day for work an am now considering purchasing a condo in my work city to stay at during the work week. Would this distance allow me to purchase as a second home? What do you anticipate the down payment requirements would be for such a property?

  3. I have a primary residence that I refinanced 3 years ago, I want to rent it out now. The agreement has a 12 month owner occupancy agreement. Do I have to do anything before renting it out or can I start renting it out now because I have occupied it for longer than 12 months.

    1. Hi Greg:

      You can rent it out and keep your interest rate the same, but you do have to let your mortgage lender know. There’s a conversion process that takes place and they will want to make sure you have a rental agreement in place, etc. Hope this helps!

    1. Hi Gregory:

      You’ve come to the right place. If you’re looking for a home loan, we can help you get started online through Rocket Mortgage®. You can also give one of our Home Loan Experts a call at (888) 980-6716. If you happen to be working for a home or a real estate agent, I recommend checking out our friends at Rocket Homes℠. Have a great day!

  4. I’ve retired 2 years ago, last year I have moved to an apartment that I own that is pay off and is my primary residence; can I still deduct mortgage interest and taxes on the other 2 that I own ?….and/or can I convert one of the other 2 hoses in a rental property to be able to deduct the mortgage interest and taxes ?

    1. Good morning, Enrique:

      I’m going to take the second part of that question first because it’s easiest. You can deduct state and local property taxes on your federal taxes up to a limit of $10,000 ($5,000 for married folks filing individually). As far as mortgage interest, you can deduct for your primary home and one second home. You can’t deduct it on a rental property. However, if you were to convert something into a rental property, you can deduct expenses associated with the rental property. Hopefully this helps!

  5. I live in a rented apartment and do not currently own a home. However I plan to buy a home in a city 250 miles from my place of employment. My spouse will reside there approximately 2 weeks per month and we both will reside there full time within 6 months when I retire. Will this be a primary residence loan or a second home loan?

    1. Hi Charles:

      If you can provide documentation of distant employment, your spouse may be able to occupy the property as a primary residence if she lives there the majority of the time. I’m going to recommend you speak with one of our Home Loan Experts at (888) 980-6716. Hope this helps!

  6. My wife and I bought a house 32 years ago. It’s in Nassau co ny. For the past 5 years we have lived apart and for the past 2 years We have filed married separate. I’ve been renting and I now want to buy my own home. I don’t want or need my wife on the title or mortgage. My question is … if I buy my home will I be able to deduct the full property tax? With the new tax laws , I was told because of the first home my wife lives in and pays for , I won’t be able to deduct MY taxes , just my mortgage because my wife uses her taxes to write off already. I have lived on my own for over 5 years , filed married separate for 2 years. I want to buy a home but can or can’t I deduct my full property taxes which will be $13000 ( I know your now only allowed $10,000) Thank you for any and all help. John

    1. Hi John:

      For this one, you may want to consult a tax professional. The IRS guidance I can find says that the limit if you’re married, but filing separately is $5,000 but I think that also assumes you’re living in the same house. Unfortunately, while we give some basic financial advice on deductibility as relates to property, you’re better off consulting a professional or at the very least specialized tax software. The IRS can also be called at (800) 829-1040.

  7. 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!

  8. 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!

  9. 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!

  10. 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

  11. 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!

  12. 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!

  13. 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!

  14. 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.

  15. 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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