Tim Cranch wearing blue shirt

Tim Cranch

Ellie Penaranda

Naples FL – Definition of a Second Home Depends on Who You Ask and What Rules Apply

We like to take care of our clients in every step of the home purchase process.  For those of you wanting to take advantage of the low interest rates, it means financing.  I could not have written this any better so I wanted to share what Chris Carter with Paramount Mortgage Group wrote on the subject.  I hope you find it helpful.

“The IRS definition deals with tax deductions, while a lender’s determines interest rate and down payment.

Although the IRS says something is acceptable on a tax return, a lender might have a different interpretation and apply their own guidelines. The IRS is concerned with taxable basis – a lender focuses with risk management. Image

The 3 main categories of real estate occupancy and use are:

Primary Residence   –   Second Home   –   Investment Property

Keep in mind while you’re reading today that for the same loan program (30-year fixed for example) a primary residence will usually have a lower interest rate than a second home, which in turn will have a lower interest rate than an investment property.

Additionally, maximum LTVs (Loan-To-Value ratios) are also usually higher for primary, lower for second homes, lower still for investment properties. This means a higher down payment is required for second homes and investment properties. As we’ve mentioned in other newsletters, LTV and rate offered are important factors in all lenders’ risk management. For lenders, primary residence loans carry less risk than second home or investment property loans. 

Although there can be some exceptions, generally an owner may have 1 primary residence and 1 designated second home. Any other properties owned are then considered investment properties.

Interpretation of an owner’s use can make the difference between a higher or lower mortgage interest rate, a required down payment, and even overall loan program eligibility.

The Primary Residence definition is pretty much shared by all : Where a person lives for most of the calendar year, based on things like:  Close to employment – Address on driver’s license and vehicle registration – Mail delivery – Local family, business, church, and social affiliation – Address on Federal and state income tax returns – Voter registration.

It’s when we talk about second homes that things get a little blurry depenImage 1ding on whether you’re filing tax returns or applying for a loan. In their Publication 936 (Home Mortgage Interest Deduction when itemizing deductions), the IRS calls a second home “a home that you choose to treat as your second home”.  Not much clarity there, huh? They go on to say that if this second home is not rented out, it is automatically considered a “qualified home” for tax purposes even if the owner doesn’t use it during the year. 

When a second home is rented to someone else for part of the year (seasonal rentals), the owner must also stay in the house “more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer”.  If the owner does not stay at this home long enough in that given year, it is then treated as rental property, not a second home. As such, rental income and allowed expense deductions are handled differently and accounted for on a Schedule E (Supplemental Income and Loss) rather than a line item deduction on the 1040 – consult your tax pro for details.  Important: A property’s use status can change from one category to another as the owner buys one, sells another, or changes her/his use.

Lenders view Second Homes a bit differently. For our discussion today, we’re going to use FNMA’s (the Federal National Mortgage Association) guidelines which are considered the benchmark for conventional (non-government insured) mortgage qualifying standards. FNMA’s current Second Home guidelines are: 

  • Reasonable distance from Primary Residence – usually at least 50 miles –
  • Occupied by borrower some portion of the year –
  • Restricted to 1-unit dwellings (SFR or individual condo unit) –
  • Suitable for year-round occupancy –
  • Borrower has exclusive control over property –
  • No rental or timeshare arrangements (even to family members) –
  • Management company cannot control occupancy (be a rental agent)

Right off we see some significant differences in how second homes are viewed by the IRS and by mortgage lenders:

                                               IRS               Lender

Periodic Rentals                 OK                    No

Owner Occupancy         Minimums        Open

Location                              Open             Distance

Rental Management          OK                    No

Under either set of guidelines, if a property’s use doesn’t conform to second home guidelines, it defaults to rental or investment property status which is property purchased with the intent of producing cash flow and/or price appreciation. Many of your buyers are interested in second homes here in South Florida. It’s important for them to know how a property’s use is viewed by lenders and what financing options are available to them”.


 If you are considering financing your Naples home purchase, take the first step and contact Chris Carter with Paramount Mortgage Group  239-898-5455   for all financing questions and pre-approval.  You will enjoy working with him and you will benefit  from his knowledge and experience.

Now Qualified and Ready?  Call Tim or Ellie at 239-776-5077 and we will find you the right home that fits your needs…