Summary

A while ago I noticed that there is some confusion around financing and qualification for residential loans specifically for second homes. So I decided to dig a little bit into this, and here is what I found. This is a short note that lays out my interpretation for the qualifying criteria.

Why second home?

Second home financing is interesting to real estate investors, because for properties that qualify the interest rates are more favorable than interest rates for equivalent investment properties. Typically, the second home interest rates are 0.5% higher than those for primary homes; and in turn the interest rates for residential income properties, the interest rates are 0.5% higher than those for second homes.

So, being able to qualify for a second home, will save you half a percent of interest over the lifetime of the loan. If your property qualifies, that is.

Before we go into details, one point is very important to make. Mortgage fraud is a thing. While you can put whatever you want on your loan application when asked whether the loan you are looking for is for a second home, you must not knowingly make false statements on your loan application.

If in doubt, it is a good idea to consult the FNMA selling guide. This is a document that outlines the rules that the Federal National Mortgage Agency (FNMA, or “Fannie Mae”) uses for the mortgages that it will buy. If you heard about “conforming” loans, this is the rule set that those loans conform to.

Second home criteria

Incidentally, the selling guide, in its infinite wisdom, defines the detailed criteria for a home to qualify as your second home. But, it might be more useful to offer some interpretation of the rules, to avoid misunderstandings.

The first interesting point that is not listed in the criteria is the note that despite the term of trade used, there is no limit to the number of “second homes” you may finance. You can have more than one “second home”, so long as other criteria are satisfied.

Another not listed rule is that you can typically have only one second home in a given area. I have not found firm criteria for this. But the lenders that I did talk to said that a second home must be at least 50 miles away from any other residences that you may own. This rules out financing a tract of homes as second homes in a given area.

The first “official” criterion on the list is “must be occupied by the borrower for some portion of the year”. The nice bit about this rule is that there isn’t really a minimum number of days - it would seem that any number greater than zero would be just fine. That means, so long as you visit your second home at least a minimum amount of time every year, it fulfills this criterion.

Second is the “is restricted to one-unit dwellings”. So, duplexes and up are out.

Then, “the borrower must have exclusive control over the property”. So, no partnerships with people who are not on the loan.

“Must not be a rental property or a timeshare arrangement”. So, timeshares are out, but since they usually aren’t great deals to begin with I don’t see this as a big issue. The “must not be a rental property” has a footnote, which seems to indicate that rentals are allowed, but if the property is to be a rental, then its income must not be used to qualify for this loan. This to me seems to be a relatively weak restriction that we can work with.

“Cannot be subject to any agreements that give a management firm control over the occupancy of the property.” So, no property management companies, you must self-manage.

“Must be underwritten in DU…” is not a restrictive requirement, it would seem, it just says that if all the above is satisfied, the rest if more or less the same as for other properties that aren’t evaluated as second homes.

And with that, we concluded the trip down the list of second home criteria.

Conclusion

I presented a quick interpretation of the rules for financing second homes. I hope this saves you some time in discovering this information for yourself. The interpretation should hold for a wide variety of lenders, as most underwrite the residential loans with an intention of selling them to FNMA. And even in the cases of portfolio loans, which remain on the lenders’ books, the FNMA criteria still set the industry standard.