By Kalista Mefford – Keller Williams Realty
When considering the difference between a self-use (primary residence) and an investment property you first need to understand how lenders define them:
Primary Residence (Self-Use): An individual can only have one primary residence at a time and is defined by being the home that you live in. You do not have to live in the home all year long. For example, if you travel for several months out of the year, this home can still be considered your primary residence.
There are 3 major differences you will see between the Self-Use and Investment Loan. These differences are based on the increased risk that investment properties pose, from vacant properties to bad tenants that take months to evict. The major difference you will see are to credit score, interest rate, and down payment.
- Credit Score – The minimum credit score for a primary residence can be as low as 620. The minimum credit score ranges for an investment property begin around 720 based on whether you get a fixed-rate mortgage or an adjustable-rate mortgage.
- Interest Rate – Investment properties will have a higher interest rate then self-use. This is because they pose a greater risk. Owners are more likely to foreclose on a bad business venture then on their personal property. Rates will also take into consideration the amount of experience an investor has, as they want to be sure the investor has the knowledge to make wise decisions.
- Down Payment – While self-use loans can have down payments as low as 2.5%, investment properties require a down payment of 25% or more of the purchase price. You will also be required to show that you have cash reserves of at least 12 months. This requirement is put into place to ensure your ability to pay the mortgage even if you do not have an active tenant.
It is important when planning to get an investment loan to keep these differences in mind and financially plan accordingly.