Borrowers wishing to purchase a 2nd home, a rental property or a non-owner occupied property will need to know what classifies homes as such.
The rule of thumb is a 2nd home is just that-- a 2nd home-- one that is not their primary home and where a homeowner will spend extensive time throughout each year but not rent it out. A 2nd home cannot be purchased in the same city as their primary home and must be at least 55 miles in distance from their primary residence.
A rental property or non-owner occupied property is a property that is within 55 miles of their primary or any property that will be used to generate income by renting it out. If a homeowner wishes to buy a home for kids or parents and not charge them rent, and that property is in the same city or less than 55 miles away, then it is still considered a rental property.
As a side note, the FHA will allow what is called a non-occupant co-borrower for people who wish to go on a loan in the same city with kids or relatives BUT all parties must qualify for credit and be on the loan. It important to classify the occupancy correctly as the down payment requirement is much higher and interest rates much higher for non-owner occupied properties.
Downsizing to a smaller home may be more difficult than you might think. When an underwriter sees that a buyer is purchasing a property less than 55 miles away and that is less expensive than what they are living in, they will automatically want to classify it as a rental. Even if the borrowers are truly downsizing, they must prove to the lender that they are indeed moving to a smaller home especially if they retain the larger property. It can be done but there are many hoops to jump through. For more information, please call Indigo Mortgage at 505-836-5700.
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