Financing a Second Home or Rental in Davis County: How Lenders Treat It Differently

How is financing a second home or rental property different from a primary home loan? Lenders see more risk in a property you do not live in, so they usually ask for a larger down payment, more cash in reserve, a stricter look at your credit, and sometimes a higher interest rate. The exact numbers change with the lender and the loan program, so get them from a lender rather than from an article.

Charisse Walker is a real estate agent with Chalker Properties Group in Salt Lake and Davis County, Utah, and a licensed mortgage lender. This post is general education about how these loans tend to work. It is not a loan offer or a quote, and I do not give lending advice on a transaction where I am your agent. A loan officer reviews your situation and gives you the real terms.

Lenders sort properties into three groups, and the group sets the rules:

• Primary residence. The home you live in most of the year. It gets the most favorable terms.
• Second home. A home you will use for part of the year yourself, usually in a different area from your primary home. Lenders often ask that it be a certain distance from your main home and that you do not rent it out as a business.
• Investment property. A home you buy to rent to tenants or to resell. It is held to the strictest standards.

You have to tell the truth about which one it is. Telling a lender a rental is your primary home to get better terms is occupancy fraud, and it carries serious consequences. If your plans are mixed, say so and let the lender explain the options.

In general, expect to need more down for a second home or rental than for a home you live in. Programs that allow very small down payments on a primary home often do not apply to investment properties. FHA and VA loans, for instance, are meant for homes you will live in, and they generally cannot be used for a pure rental. Our post on FHA versus conventional loans explains the difference for a primary home.

Down payment amounts vary by lender, by whether the property is a single-family home or a multi-unit building, and by your credit and finances. Ask each lender for a written breakdown before you decide.

One more point: money borrowed for the down payment is treated differently from savings. Ask how the lender views any funds that are not yours, and what paperwork it wants.

Reserves are savings left over after your down payment and closing costs. They are money you could use to make loan payments if a tenant left or the property needed a repair. Lenders often ask for several months of payments in reserve on a second home or rental, and they may ask for more if you own other properties.

Reserves are often a bigger surprise than the down payment itself. A buyer who has just enough for the down payment can be turned down for lacking reserves. Add your reserve target to your savings plan before you start looking.

Do not assume that all of the rent will count toward your qualifying income. Many lenders use a share of documented or appraised rent, and subtract expenses such as taxes, insurance and vacancy. Some use a lease. Some use an appraiser's rent estimate. For a property that has not been rented before, the rules can be stricter.

The two things to ask a lender are how much of the rent they will count and what documents they need. Then build your own budget on a more cautious number than the lender uses. Real rentals have empty months, repairs and turnover.

Our guide to analyzing cash flow on a Utah rental property shows how to work through those costs before you offer.

Rates on investment properties are commonly higher than rates on primary homes with the same loan, and lenders may add extra pricing adjustments for lower down payments or lower credit scores. I will not quote a rate here, because rates change daily and depend on your file. Ask a lender for current numbers in writing, and ask for them for a primary home and for a rental so you can compare.

Closing costs also apply to rentals, and they are in addition to your down payment and reserves. See what home buyers pay in closing costs in Utah for the main categories.

Yes. A single-family house, a townhome, a condo and a two-to-four unit building can each be treated differently. Condos bring HOA documents and sometimes extra lender review of the association's finances. Multi-unit buildings often have their own rules, and rental income may count more heavily. If you are looking at a home with a basement apartment, ask whether the unit is legal, since that affects what a lender and an appraiser will count.

Local factors matter too: property taxes, insurance costs and the local rules on renting out a home. Cities in Davis County such as Layton, Clearfield, Kaysville and Syracuse set their own rules on rentals and accessory units, so check with the city before you plan around the rent. See the Layton area page for one example of a market buyers often compare.

• Using primary-home numbers for a rental. The down payment, reserves and rate are different.
• Counting 100% of the rent. Vacancy, repairs and management are real costs.
• Not asking about reserves. A down payment without reserves can end a loan.
• Calling an investment a primary home. It is occupancy fraud, and it is never worth the risk.
• Buying before checking the city's rental rules. A legal rental depends on local rules.
• Shopping one lender only. Programs differ, so compare at least two.
• Skipping a tax professional. Rental income, depreciation and the sale of an investment property carry tax effects. See 1031 exchange basics for Utah investors and ask your own tax professional.

Here is a typical example, not a specific client. A buyer who owns a home in Farmington wants to buy a townhome in Layton to rent out. The buyer has a good credit history and has been saving, but plans to use almost all of the savings for the down payment.

The lender explains that the loan will need a larger down payment than the buyer's primary home, plus several months of reserves, and that only part of the expected rent will count toward qualifying. The buyer pauses, saves for several more months, and comes back with a plan that works on the lender's numbers and on a cautious budget of their own.

That delay was not a failure. It kept the buyer from stretching to a deal that would have been tight the first time a tenant moved out.

Charisse Walker is a real estate agent with Chalker Properties Group in Salt Lake and Davis County, Utah, and a licensed mortgage lender. When I act as your agent, your loan belongs to your lender, and I stay out of the loan itself. I help you compare properties on facts, build the offer, keep the deadlines, and ask your lender the questions a buyer should ask.

If you are weighing rental properties, see our investment property page for how we approach them, and the process page for how a purchase moves from offer to closing.

Can I use an FHA or VA loan for a rental?

Generally not for a pure rental, because those loans are meant for a home you will live in. Rules vary, so ask a lender about your case.

Do I need a larger down payment for an investment property?

Usually, yes. Ask for written numbers from your lender.

Will the rent help me qualify?

It can, in part, depending on the lender and loan program. Do not rely on it until the lender confirms what it counts.

Is a second home the same as a rental?

No. A second home is for your own use part of the year and has different rules from an investment property.

Should I buy in an LLC?

That is a question for an attorney and a tax professional. Financing for a business entity can also work differently from a personal loan.

Start with a lender conversation and a cautious budget, then bring me the properties you are considering. Contact Charisse here.

This article is general education and does not replace advice from a lender, attorney or tax professional.