Qualifying for a mortgage: Occupancy matters
When you buy a home, mortgage lenders need to know whether you plan to live there full time. If you’re buying a primary residence, you can get a lower interest rate, make a lower down payment, and qualify with a lower credit score.
If it’s a second home, on the other hand, your mortgage loan will cost more and the lender will enforce stricter requirements.
There are very few scenarios where you can have two primary residence mortgages at once. But it’s not unheard of. Here’s what you need to know.
In this article (Skip to…)
- Primary residence definition
- Occupancy requirements
- Buying your next home
- Living in two homes at once
- Qualifying for the loan
- FAQ
What is a primary residence?
Typically, your primary residence is the home where you spend the majority of your time. For example, if you live in Ohio for most of the year but spend a couple months in Florida, your Ohio home is your main home. A primary residence can also be called a “principal residence” or “primary domicile.”
Even if you split your time evenly between two homes, one of them will still be considered your primary residence for mortgage lending and tax purposes.
Your primary residence is defined as the address:
- Where you get most of your mail
- Where your cars are registered
- Listed on your driver’s license
- On your IRS income tax returns
- On your voter registration card
Even if you can make a case for having two primary residences at once, only one home at a time can be designated your primary residence by the IRS and your mortgage lender.
Occupancy requirements for mortgage lending
When times get tough, homeowners are more likely to keep up mortgage payments on their primary residences than on additional properties. So, compared to loans for rental properties and vacation homes, primary residence loans are less risky for lenders.
Less risk means lower mortgage rates and easier qualification requirements for buyers. Fannie Mae conventional loans, for example, add 3.375% in fees for second homes with 20% down. These fees translate into higher interest rates for borrowers.
Government-backed single-family mortgages — such as FHA, USDA, and VA loans — work only for financing a new primary residence. You cannot use these loan programs to buy a home unless you plan to live there full time.
Residence type impacts your taxes, too
Home occupancy types have big tax implications. Primary residences are exempt from capital gains tax on profits up to $250,000 ($500,000 if married and filing jointly). This, effectively, eliminates the capital gains tax for many home sellers.
Eliminating a 20% capital gains tax on $250,000 saves $50,000 — a big tax benefit compared to selling a second home or vacation home.
Real estate property taxes tend to be lower on primary residences, too. And a lot of tax deductions and tax credits apply only to primary residences.
Buying a new primary residence while keeping your existing home
Your current primary residence may not be ideal indefinitely. What if your family outgrows the home? What if you get a new job in a new city?
Lenders understand that your plans and needs might change. And you can buy a new primary residence without selling your existing home, as long as you have enough income to make both house payments. (If your existing home is paid off, your lender will still consider ongoing insurance and property tax payments when qualifying you for the new home loan.)
To get a new primary residence mortgage, you’ll need to certify that you intend to use the new home as a principal residence. In most cases, you’ll need to move into the new home within 60 days of closing.
When you move, you should get in touch with your existing lender to share your plans for the home, just to make sure no changes to your loan status are required. And contact your homeowner’s insurance company to see whether your current coverage is still sufficient — especially if you plan to rent the home out.
Buying a new home and renting out the old one
When you buy a new primary residence, you could convert your existing home into a rental home. Rental income could help cover the cost of holding two home mortgages at once. But before you do this, get in touch with your lender or loan servicer about your plans for the home. Again, changes to the loan may be necessary.
Contact your homeowners insurance company, too. A standard homeowners policy won’t adequately protect a rental home. You’ll need a landlord insurance policy.
Also keep in mind that owning an investment property can complicate your income taxes. You may need to hire a CPA or another tax professional to work out the tax details. For example, you may become a self-employed taxpayer.
What if you really do live in two homes?
What if you live in two homes pretty much equally? For tax purposes, you’ll have to designate one of the homes as your primary residence, even if it’s an arbitrary choice.
Typically, you cannot finance both homes as primary residences simultaneously. But lenders might consider allowing it under certain circ*mstances. It may be possible to have two primary residence mortgages at once if you’re moving for unavoidable reasons — for example, if your family outgrew your existing home or if your company moved you to a new job in a new city.
Considerations for two primary residence mortgages:
- Distance: How far apart are the two houses?
- Work: Does your job create the need for two houses?
- Family: Has your family expanded to the point that you need an extra house? Or do you have a dependent you’re purchasing property for?
The type of home loan will also make a difference. Since government-backed loans finance only primary residences, these loan programs have clear rules about owner occupancy.
Conventional loans on two primary residences
They’re not insured by a federal agency, and they’re not limited to financing primary residences. But conventional conforming loans still follow rules set by the government-sponsored enterprises, Fannie Mae and Freddie Mac.
These rules include charging higher mortgage interest rates on second homes and investment properties. Normally, Freddie and Fannie allow a homeowner to finance only one home at lower primary residence rates.
When you can have two conventional loans at once:
- Buying as a caregiver: If you own your own home but want to buy a separate home for your adult child who has a disability, Fannie and Freddie can treat the new home as a primary residence loan. Likewise, an adult child can buy a home for an aging or ill parent and get lower primary residence rates
- Non-occupant co-borrowers or co-signers: You could co-borrow or co-sign to help a friend or family member while also buying your own primary residence — assuming you have income to cover both monthly payments
- Military members on duty: A military service member can retain owner-occupied status while deployed or on active duty away from home
Lenders will likely decide your fate on a case-by-case basis. It’s smart to document your need for two primary home loans. The easier you make it to approve your request, the more likely you are to get what you want.
FHA loans financing two primary residences
The FHA will not approve a new loan for a second home or investment property. The FHA loan program exists to finance primary residences.
Since these loans work only as primary residence mortgages — and since homeowners can have only one primary residence — borrowers can’t have more than one FHA loan at a time. BUt, again, there are possible exceptions.
When you can have two FHA loans at once:
- You’re relocating for a job that’s far away (specific distance requirements vary)
- You’ve outgrown your current home and have already paid off 25% of its value (in other words, the loan-to-value ratio, or LTV, is 75%)
- You’re divorcing, though spouses who keep the house may be able to refinance their homes into their own name
- You’re a co-signer for someone else’s FHA loan
Of course, for any of these scenarios to work, you’d need enough income to afford both monthly payments. And you’d need to meet your lender’s eligibility requirements.
VA loans on two primary residences
Like FHA loans, VA loans — which help military veterans and service members buy their own homes — exist to finance primary residences.
However, the Department of Veterans Affairs understands that service members move around a lot, especially when they get new duty assignments. The VA does not require homeowners to sell, pay off, or refinance their VA-financed home before buying a new one elsewhere.
But second home loans may not get one of the VA’s signature benefits: borrowing with no down payment.
Some vets can get two loans with no money down. It depends on how much VA loan entitlement the borrower has remaining. Second VA loans require a higher upfront VA funding fee than first-time loans, too. VA loans never require mortgage insurance.
Home buyers must move into their newly financed VA home within 60 days of closing unless the VA grants an exception.
USDA loans on two primary residences
The USDA, which guarantees loans in rural and some suburban areas, will never allow a borrower to have more than one USDA loan at a time. But a homeowner could convert a USDA-financed home into a second home or investment property and then buy another primary residence with a different type of loan.
This works only after the homeowner has used the USDA-financed home as a primary residence for at least a year.
Just like with any other type of mortgage, the homeowner would have to qualify for two loans at the same time. Qualifying includes having enough income to make both house payments.
Occupancy rules vs. qualifying rules
In some situations, your loan type and lender can grant permission for two primary residence loans at once. But getting permission to apply isn’t the same as getting approved to borrow. You still need to qualify for two mortgage loans simultaneously.
That means meeting the credit score minimums and other underwriting rules. It also means earning enough steady and reliable income to cover both house payments along with your other debts.
And it means having the cash reserves to cover the new home’s down payment and closing costs. Down payment assistance programs normally work only for primary residences and/or first-time home buyers.
Two primary residences FAQ
Can a husband and wife buy separate primary residences?
Yes, married spouses could buy separate primary residences if they don’t co-borrow on each other’s mortgages. Each borrower would need enough income and credit to qualify for a mortgage as a sole borrower. Even though they have separate mortgages, the state may consider both homes joint marital property.
What’s the difference between a second home and an investment property?
If you buy a home for the sole purpose of earning rental income, and you won’t be spending time there yourself, it’s considered an investment property. A second home or vacation home is a home you plan to live in for at least part of the year. This distinction matters because interest rates and fees differ between vacation home and investment property loans. Be sure to make your intentions for the property clear to your loan officer.
What is the 2 out of 5 rule?
You can claim the tax benefits of a primary residence if you’ve lived in the home two of the past five years. This rule doesn’t apply to mortgage lending.
Can I buy another house if I already have a mortgage?
Yes, if you can qualify for two loans at once, you can buy multiple homes at once. Some homeowners use cash-out refinancing or home equity loans to generate down payments for a second home. But in most cases only one of your homes can be considered your primary residence for lending and tax purposes.
What are today’s mortgage rates?
Mortgage rates depend on whether you’re buying a primary residence (least risky and cheapest to finance), a second home (tougher guidelines and sometimes risk-based surcharges) or a rental/investment property (riskiest and most expensive).
If you’re a first-time homebuyer, you’ll automatically get primary residence rates. If you already own a home, you’ll get a better deal if you’re buying a new primary residence.
The best way to find out is to share your unique borrowing needs with a lender. Applying for online pre-approval is a great way to start the conversation.
FAQs
Can you have two primary residence mortgages? No, you cannot legally have two primary residences. Even if you split your time equally between two places or in between places while relocating for work, the IRS requires you list one property as a primary residence while filing taxes.
Can a married couple have two primary residence mortgages? ›
For tax purposes, you'll have to designate one of the homes as your primary residence, even if it's an arbitrary choice. Typically, you cannot finance both homes as primary residences simultaneously.
Can I get a mortgage if I already own a house? ›
If you own your home outright, with no current mortgage, its value is all equity. You can tap that equity by taking out a loan against the home's value. There are several mortgage loan options available when getting a loan on a home you own outright, including a cash-out refinance, home equity loan, or HELOC.
Can you get a mortgage if your name is already on one? ›
Applying for a mortgage as a single applicant while married is quite common. A number of reasons can warrant applying for a mortgage in just one name and most lenders will consider this arrangement. A single application can be more suitable than a joint mortgage if: Your partner has bad credit.
How does the IRS determine your primary residence? ›
If you own and live in just one home, then that property is your main home. If you own or live in more than one home, then you must apply a "facts and circ*mstances" test to determine which property is your main home. While the most important factor is where you spend the most time, other factors are relevant as well.
How many mortgages can one person have in their name? ›
Lenders impose stricter qualifications when you want to qualify for more than four mortgages. In fact, underwriting guidelines tighten considerably when you want more than four mortgages. You may need to provide proof of some or all of the following items: 25% down payment on each investment property.
How long to live in a house before selling to avoid capital gains? ›
1. Live in the house for at least two years. The two years don't need to be consecutive, but house-flippers should beware. If you sell a house that you didn't live in for at least two years, the gains can be taxable.
What does the IRS consider a second home? ›
A property is viewed as a second home by the IRS if you visit for at least 14 days per year or use the home at least 10% of the days that you rent it out. Many homeowners rent out their second home, but personal and rental use affects taxes in different ways.
What is the primary residence exclusion? ›
To qualify for the principal residence exclusion, you must have owned and lived in the property as your primary residence for two out of the five years immediately preceding the sale. Some exceptions apply for those who become disabled, die, or must relocate for reasons of health or work, among other situations.
Can I get a home equity loan with a 500 credit score? ›
If you have bad credit, which generally means a score less than 580, you probably won't qualify for a home equity loan. Many lenders require a minimum credit score of 620 to qualify for a home equity loan. However, to receive good terms, you should aim to have a credit score of 700 or higher.
Sale-Leaseback Agreement. One of the best ways to get equity out of your home without refinancing is through what is known as a sale-leaseback agreement. In a sale-leaseback transaction, homeowners sell their home to another party in exchange for 100% of the equity they have accrued.
Is it better to own your home outright? ›
When you own a house outright, you cannot get upside-down on your mortgage loan. There's no risk of being forced to stay in the home simply because you owe more than the home is worth. Regardless of what the market does, you're able to make value-based decisions on what to do with your property.
Who owns the house if there are two names on title and one on the mortgage in California? ›
In the event you opt for two names on the title and only one on the mortgage, both of you are owners. The person who signed the mortgage, however, is the one obligated to pay off the loan. If you're not on the mortgage, you aren't held responsible by the lending institution for ensuring the loan is paid.
Whose credit score is used on a joint mortgage? ›
On a joint mortgage, all borrowers' credit scores matter. Lenders collect credit and financial information including credit history, current debt and income. Lenders determine what's called the "lower middle score" and usually look at each applicant's middle score.
Is it better to have 2 names on mortgage? ›
Benefits of having multiple names
Applying with a co-borrower might make it easier to qualify for a loan. Two incomes are better than one! If the co-borrower has good credit and a steady job, for example, this can help strengthen your application and improve your chances of getting approved.
Will IRS seize your primary residence? ›
The answer to this question is yes. The IRS can seize some of your property, including your house if you owe back taxes and are not complying with any payment plan you may have entered. This is known as a tax levy or tax garnishment. Typically, the IRS will start by garnishing your wages, salary, or commission.
What is the 2 out of 5 year rule? ›
Ownership and use requirement
During the 5 years before you sell your home, you must have at least: 2 years of ownership and. 2 years of use as a primary residence.
What are exceptions to 2 year rule sale of primary residence? ›
For example, a death in the family, losing your job and qualifying for unemployment, not being able to afford the house anymore because of a change in employment or marital status, a natural disaster that destroys your house, or you or your spouse have twins or another multiple birth.
What is the Brrrr method? ›
The BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Method is a real estate investment approach that involves flipping a distressed property, renting it out and then getting a cash-out refinance on it to fund further rental property investments.
Can you have 3 mortgages at once? ›
Yes, you can have more than one mortgage. For most traditional lending institutions, the short answer is four. Generally, with good credit and a solid down payment, you should be able to finance up to four properties. There are even circ*mstances in which a lender may lend on more than four properties.
Generally speaking, most mortgage programs will require: A DTI ratio of 43% or less. This means a maximum of 43% of your gross monthly income should be going toward your overall monthly debts, including the new mortgage payment. Of that 43%, 28% or less should be dedicated to your new mortgage payment.
What is the 6 year rule for capital gains tax? ›
Here's how it works: Taxpayers can claim a full capital gains tax exemption for their principal place of residence (PPOR). They also can claim this exemption for up to six years if they moved out of their PPOR and then rented it out.
What will capital gains tax be in 2023? ›
Long-term capital gains tax rates for the 2023 tax year
In 2023, individual filers won't pay any capital gains tax if their total taxable income is $44,625 or less. The rate jumps to 15 percent on capital gains, if their income is $44,626 to $492,300. Above that income level the rate climbs to 20 percent.
How can seniors avoid capital gains? ›
The Bottom Line. The IRS allows no specific tax exemptions for senior citizens, either when it comes to income or capital gains. The closest you can come is a back-end tax-advantaged retirement account like a Roth IRA which allows you to withdraw money without paying taxes.
Is a second mortgage considered income? ›
For tax purposes, second mortgages are considered to carry mortgage interest because they use your house as collateral. Your current debt load will impact whether or not you can include second mortgage interest alongside your other homeowner tax deductions.
How many main homes can a person have according to the IRS? ›
The IRS is very clear that taxpayers, including married couples, have only one primary residence—which the agency refers to as the “main home.” Your main home is always the residence where you ordinarily live most of the time.
Is a second home an asset or liability? ›
Given the financial definitions of asset and liability, a home still falls into the asset category.
What is the one time capital gains exemption? ›
Key Takeaways. You can sell your primary residence and be exempt from capital gains taxes on the first $250,000 if you are single and $500,000 if married filing jointly.
Do I have to report sale of home to IRS? ›
Reporting the Sale
Report the sale or exchange of your main home on Form 8949, Sale and Other Dispositions of Capital Assets, if: You have a gain and do not qualify to exclude all of it, You have a gain and choose not to exclude it, or. You received a Form 1099-S.
How often can you take primary residence exclusion? ›
You can exclude capital gains from the sale of a primary residence once every two years. If you want to claim the capital gains exclusion more than once, you'll have to meet the usage and ownership requirements at a different residence.
In most cases, you'll need a credit score of at least 680 to qualify for a home equity loan, but many lenders prefer a credit score of 720 or more. Some lenders will approve a home equity loan or HELOC even if your FICO® Score falls below 680.
How much of a home equity line of credit can you take out? ›
A typical HELOC lender will allow you to access 80% of the amount of equity you have in your home but some lenders might go up to 90%, though usually at a higher interest rate.
What is the lowest credit score for a HELOC? ›
HELOC eligibility requirements
You'll need a minimum 620 score, but the most competitive rates typically go to borrowers with scores of 740 or higher. You can get your free credit score here.
Is taking out equity the same as refinancing? ›
Differences Between Home Equity Loans Vs.
Cash-out refinances are first loans, while home equity loans are second loans. Cash-out refinances pay off your existing mortgage and give you a new one. On the other hand, a home equity loan is a separate loan from your mortgage and adds a second payment.
Why is a HELOC a good idea? ›
Pros of a HELOC
HELOCs tend to have lower interest rates than other types of loans because they're secured by your home. They're also popular for their flexibility -- you can take out money as needed over a 10-year period.
What happens to equity when you pay off your mortgage? ›
As you pay off your mortgage, the amount of equity that you hold in your home will rise. The other notable way that home equity increases is when your house grows in value and your ownership stake in the property becomes worth more.
Is it financially smart to pay off your house? ›
Paying off your mortgage early can save you a lot of money in the long run. Even a small extra monthly payment can allow you to own your home sooner. Make sure you have an emergency fund before you put your money toward your loan.
Why is it better to not pay off mortgage? ›
Because mortgages tend to have lower interest rates than, say, a credit card, using extra cash to pay off those debts will save you money on interest in the long run.
What happens if your house is worth more than your mortgage? ›
While being upside down on your mortgage won't prevent you from selling your home, you will need to pay the difference between the sale price and the balance on your loan. So, if your home sells for $200,000 and you owe $225,000 on your loan, you'll need to pay the lender $25,000.
Can I put my wife on the title but not the mortgage? ›
Yes, you can put your spouse on the title without putting them on the mortgage. This would mean that they share ownership of the home but aren't legally responsible for making mortgage payments.
The short answer is “yes,” it is possible for a married couple to apply for a mortgage under only one of their names.
Can my girlfriend be on the deed and not the mortgage? ›
Both owners of the home, typically being spouses listed on the deed, do not have to both be listed on the mortgage. Remember that the mortgage does not indicate who the owner of the home is, so not being listed on the mortgage will have no effect on your ownership of the home.
Can I use my wife's credit and my income to buy a house? ›
The quick answer is: Yes! You need not apply for a joint mortgage with your spouse. Generally speaking, if you and your spouse apply for a loan jointly, the lender will look at your combined income, combined debt-to-income (dti),and both of your credit scores.
What is a good credit score to buy a house? ›
It's recommended you have a credit score of 620 or higher when you apply for a conventional loan. If your score is below 620, lenders either won't be able to approve your loan or may be required to offer you a higher interest rate, which can result in higher monthly payments.
What is the most desirable credit score range to have? ›
Although ranges vary depending on the credit scoring model, generally credit scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good; and 800 and up are considered excellent.
What is the 2 rule in mortgage? ›
2% Rule. The 2% rule is the same as the 1% rule – it just uses a different number. The 2% rule states that the monthly rent for an investment property should be equal to or no less than 2% of the purchase price. Here's an example of the 2% rule for a home with the purchase price of $150,000: $150,000 x 0.02 = $3,000.
What are the cons of having 2 mortgages? ›
Cons Of A Second Mortgage
Second mortgages often have higher interest rates than refinances. This is because lenders don't have as much interest in your home as your primary lender does. Second mortgages might put pressure on your budget.
What is the 2 2 2 rule for mortgage? ›
A good way to remember the documentation you'll need is to remember the 2-2-2 rule: 2 years of W-2s. 2 years of tax returns (federal and state) Your two most recent pay stubs.
How many financed properties can a borrower have? ›
Fannie Mae restricts the number of single family residences (i.e. 1-4 unit) properties to a maximum of ten properties owned when purchasing a second home or an investment property; however, some mortgage lenders have overlays that reduce this limit to four financed properties so be sure to ask if your mortgage lender ...
How do you get around owner occupancy? ›
Lending companies cannot force a homeowner to live in a home when they have legitimate reasons –– or even desires –– to move. However, to get out of the owner-occupancy clause on a primary residence home loan, the owner should be able to prove that they had every intention of occupying the home at the time of purchase.
Limits on the Number of Financed Properties
| Subject Property Occupancy | Transaction | Maximum Number of Financed Properties |
|---|
| Principal residence | Transactions other than HomeReady loans | No limit |
| Principal residence | HomeReady loans | DU and manually underwritten - 2 |
| Second home or Investment property | All | DU - 10 |
The 2% rule states that you should aim for a 2% lower interest rate in order to ensure that the savings generated by your new loan will offset the cost refinancing, provided you've lived in your home for two years and plan to stay for at least two more.
What is piggyback loan in mortgage? ›
A “piggyback” second mortgage is a home equity loan or home equity line of credit (HELOC) that is made at the same time as your main mortgage. Its purpose is to allow borrowers with low down payment savings to borrow additional money in order to qualify for a main mortgage without paying for private mortgage insurance.
When can a borrower own more than one FHA property? ›
You can purchase multiple homes with FHA loans under the following circ*mstances: You're relocating for a new job opportunity. This is common if your new job takes you to a different state and you haven't been able to sell your current home. Your new home is more than 100 miles away from your current FHA-financed home.
How many FHA loans can one person have? ›
While you can apply for multiple FHA loans in your lifetime, you can usually only have one at a time. This prevents borrowers from using these loans, designed for people buying a primary residence, to purchase investment properties.
What is reverse occupancy? ›
What is Reverse Occupancy? A borrower buys a home as an investment property and lists rent proceeds as income in order to qualify for the mortgage, but instead of renting the home, the borrower occupies the home as a primary residence.
What is the owner occupancy clause? ›
The mortgage occupancy clause requires you to make your home your primary residence. Occupancy statements are there to protect the value of the home and the lender from losing money. If you lie about your property being owner-occupied, you'll be committing mortgage fraud.
Can IRS take your primary home? ›
The answer to this question is yes. The IRS can seize some of your property, including your house if you owe back taxes and are not complying with any payment plan you may have entered. This is known as a tax levy or tax garnishment. Typically, the IRS will start by garnishing your wages, salary, or commission.
What is the difference between a main home and a second home IRS? ›
Essentially, a second home is defined as a place where you would only live for part of the year. The IRS defines a second home as a place that you visit for at least 14 days during the tax year. A primary residence, by contrast, is where the owner lives most of the year. It's possible to have more that one second home.
Are second mortgages high risk? ›
More Debt and Interest To Pay
11 Second mortgage lenders take more risk than the lender who made your first loan. And remember, this is more debt that you'll have to repay. So now you have two mortgages to repay, which could make getting other lines of credit in the future harder.
FHA will insure a first mortgage loan on a property that has a second mortgage or lien held by a federal, state, or local government agency. The monthly payments under the insured mortgage and second lien, plus housing expense and other recurring charges, cannot exceed the borrower's ability to repay.
What is the primary residence rule for Fannie Mae? ›
Principal Residence Properties
Only one borrower must occupy and take title to the property, except as otherwise required for mortgages that have guarantors or co-signers (see B2-2-04, Guarantors, Co-Signers, or Non-Occupant Borrowers on the Subject Transaction).
