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Read our collection of guides and articles about refinancing to help you on your mortgage journey.

![Second home vs Investment Property](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F1af699dbb3d04c589790f3da308c47e2)

 ## What You’ll Learn

<p class="learnfont">A second home is a property you buy to use primarily as a vacation space for part of the year.</p>

<p class="learnfont">An investment property is a home you buy when you want to earn rental income, and not use the property yourself.</p>

  <p class="learnfont">Mortgage requirements and tax treatments differ for second homes and investment properties, so you’ll need to decide how you plan to use the home in advance.</p>

  </div>
  <br><br>

Pursuing a real estate investment can be an exciting venture, even if this isn’t your first time going through the paces. But if you intend to get a mortgage, you’ll need to decide exactly how you’ll use the home — as a personal vacation spot or to generate income from rentals.

Second homes and investment properties each have home loan and tax requirements. So, here’s what you should know if you’re trying to decide which [property type](https://better.com/content/primary-residence-second-home-or-investment-property-whats-the-difference/) may be best for your goals. 

## What is considered a second home?
A [second home](https://better.com/content/buying-a-second-home/) is typically thought of as a vacation home, or one you intend to use on a part-time basis. A second home must meet the following criteria to qualify for a second home loan:

The property must be suitable for year-round occupancy, even if you only intend to use it for part of the year.

&#8226; The home must be a single-unit dwelling.
&#8226; The property typically must be located at least 50 miles from your primary residence.
&#8226; You must have exclusive control over the property, without any timeshare or long-term rental agreements.
&#8226; The home may not be under the control of a property management company.


## What is considered an investment property?
An [investment property](https://better.com/content/investment-property-loans-5-things/) is also known as a rental property. Rather than occupying the home yourself, an investment property should be leased to tenants to generate rental income. Here are the requirements for investment property loan eligibility:

&#8226; The property cannot be owner-occupied.
&#8226; The home can have more than one unit, with up to four units allowed.
&#8226; You can rent out the property.
&#8226; The property can be located within 50 miles of your primary residence.
&#8226; A property management company can manage the home.


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 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/preapproval/nxt-purchase?utm_source=website&utm_medium=webpage&utm_campaign=blog&utm_content=second-home-vs-investment-property">Get started with Better Mortgage</a>  
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 ## Tax implications for a second home vs. investment property
When it comes to taxes, second homes are treated similarly to your main home or [primary residence](https://better.com/content/primary-residence-second-home-or-investment-property-whats-the-difference/). You’ll typically be allowed to write off mortgage interest up to the [$750,000 limit](https://turbotax.intuit.com/tax-tips/home-ownership/buying-a-second-home-tax-tips-for-homeowners/L5Mzc5URo "external"). However, if you have multiple properties, you can only deduct up to $750,000 in mortgage interest between them. The limit is not per property. Instead, it is a total deduction amount.

On the other hand, investment properties may allow for more freedom regarding [eligible deductions](https://www.bankrate.com/mortgages/second-home-vs-investment-property/ "external"). Owners may deduct any amount of mortgage interest, as well as certain expenses, including:

&#8226; Property taxes
&#8226; Utilities
&#8226; Advertising costs
&#8226; Maintenance costs and supplies
&#8226; Insurance costs
&#8226; Depreciation

Because tax laws can be complex, it may be worthwhile to speak with a tax professional who can review the potential tax implications of either type of property. You may also wish to review [tips from the IRS]( https://www.irs.gov/businesses/small-businesses-self-employed/tips-on-rental-real-estate-income-deductions-and-recordkeeping) on rental real estate income, deductions, and recordkeeping.

## What to know before buying a home as an investment
Any investment deserves thorough consideration, and real estate is no different. Before jumping in, you’ll want to look at how often you intend to use or rent the property and whether an additional mortgage fits into your budget. Both property types will also require expenses for upkeep and maintenance that should be factored into your decision.

## Is buying a second home a good investment?
[Buying a second home](https://better.com/content/buying-a-second-home/) can potentially be a good investment as you may gain [home equity](https://better.com/content/home-equity-vs-refinance) if the home's value increases over time. You may also be able to rent out the property when you’re not using it. However, rentals are limited to a maximum of 180 days per year. 

Keep in mind that projected rental income cannot be used to help you qualify for a second home loan. So you’ll want to confirm you’ll be eligible given your current income and financial situation. 

To qualify you'll need:

&#8226; A good-to-excellent credit score
&#8226; A down payment of at least 10%
&#8226; Enough money in liquid savings to cover the mortgage for a few months if need be.

## Investment property vs second home: Which offers better rental income?
An [investment property](https://better.com/content/investment-property-loans-5-things) may be a good match if you prioritize generating money by collecting rent from tenants. You’ll also benefit from home equity, as the property’s value increases over time or due to upgrades.

However, mortgage requirements for investment homes can be more stringent and costly than other mortgage types. These home loans also usually come with the highest interest rates, credit score requirements, and liquid asset conditions of all occupancy types. This is because investment properties tend to have higher delinquency rates than other property types — which means increased risk for mortgage lenders. 

You’ll also typically need at least 10% of the purchase price for a down payment, though you may be able to use projected rental income to help you qualify for a mortgage. 

## Can I convert a second home into an investment property?
While converting a second home into an investment property may be tempting, there could be restrictions on doing so if you have a mortgage. 

Most lenders will require you to sign a document that states how you intend to use the property. Falsifying information on that document may count as mortgage fraud, which can be punishable by fines or prison time. 

Therefore, it’s best to decide how you want to use the home before applying for a mortgage.

## Explore your next property purchase with Better Mortgage
Whether you decide a second home or investment property is best for you, Better Mortgage can help you take the next step. 

With our streamlined digital process, you can be pre-approved for a mortgage in as little as 3 minutes.

<br> 

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Discover the nuances of buying a second home versus an investment property and which option may be best for your goals.

Second Home vs Investment Property: What's the difference?

Blog post image for Second home vs Investment Property: What's the difference?

Second home vs Investment Property: What's the difference?

[![ Shadowy Image of Modern and White Computer Chair, Desk and a Laptop](https://media.better.com/content/prod/2017/07/blog_improvingyourDTI_headerimg.jpg)](https://better.com/preapprovals/purchase)

<p>When I talk to customers about getting a mortgage, they’re often concerned about their <a href="/content/how-your-credit-score-affects-your-mortgage">credit score</a>, which is an indicator of their ability to pay back loans and can affect the rates they’ll be able to get. While credit scores are certainly important, what they often don’t know is that another number, <a href="/content/what-is-a-good-debt-to-income-ratio">debt-to-income ratio (DTI)</a>, can play an even bigger role in their ability to get a mortgage. In fact, a high DTI is the #1 reason mortgage applications get rejected<sup id="fnref:1"><a href="#fn:1" rel="footnote">1</a></sup>. So what's a DTI, exactly? Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. I’ll get into the specifics of this calculation next.</p>

<p>Most lenders typically offer loans to creditworthy borrowers with DTIs as high as 43-47%. That limit is based on policies by government-backed lenders like Fannie Mae, put in place to protect customers against predatory lending practices. As of July 29th, 2017, we are working with Fannie Mae to offer loans with DTIs of up to 50% for creditworthy borrowers<sup id="fnref:2"><a href="#fn:2" rel="footnote">2</a></sup>. However, <strong>the lower your DTI, the more financing options will be available to you</strong>. Let’s look at what goes into calculating that number.</p>

<p><br></p>

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<h2 id="howdtiiscalculated">How to calculate the debt to income ratio</h2>

<p>On the one hand, the math for [calculating your DTI](https://better.com/content/housing-expense-ratio) is simple – we add up what your monthly debt will be once you have your new home (such as student loans, car loans, credit card bills, and your future mortgage payment) and divide it by your gross monthly income (how much money you earn before taxes).</p>

[![ Debt to Income Ratio = Monthly Debt Payments / Monthly Gross Income x 100](https://media.better.com/content/prod/2017/07/blog_improvingyourDTI_graphics-02.png)](https://better.com/preapprovals/purchase)

<p>The tricky part about calculating DTI is that there can be several moving parts.  </p>

<h3 id="forexample">For example:</h3>

<ul>
<li>If you haven’t found your new home yet, we won’t know your exact mortgage payments, property taxes, or insurance payments, so we’ll have to estimate.</li>
<li>If you already own a home, we’ll need to include both your future and current mortgage payments as debt (unless the purchase of your new home is contingent on the sale of your old home).
<br> <br />
In addition, when we calculate income (the other half of the DTI equation), we use <a href="https://better.com/content/so-youre-wondering-how-much-house-can-you-actually-afford/">conservative calculations</a> because we want to make sure you get a mortgage that’s affordable, now and in the future.  </li>
</ul>

<h3 id="forexample">For example:</h3>

<ul>
<li>If you’re self-employed or compensated by commission or <a href="https://better.com/content/rsu-income/">RSUs</a>, we may not be able to count all 100% of that income, given that these forms of income tend to be less consistent. </li>
<li>If you are <a href="https://better.com/content/self-employed-heres-how-to-get-a-mortgage/">self-employed</a>, it’s typically beneficial to write off your business expenses to lower your tax bill. But those tax deductions may also lower your qualifying income, since underwriters are looking at your net (not gross) income. </li>
<li>If you have rental income from an investment property, we’ll need to see that income on your tax returns (or rental checks if your taxes haven’t been filed yet) and we’ll only be able to use a portion of that income to be conservative. </li>
<li>If you plan on turning your current home into a rental property, you’ll need to have a lease agreement in place for us to consider the potential income. </li>
</ul>

[![ Got More Questions? Our Free Guide Has the Answers. Get the Guide](https://media.better.com/content/prod/2017/10/FTHB_adforblogD.png)](https://better.com/content/the-guide)

<h2 id="wecanhelpgiveyouclarityaboutyourdti">We can help give you clarity about your DTI</h2>

<p>At Better Mortgage, our goal is to give you as much certainty as we can, as soon as we can, about how much you’ll be able to get financing for. </p>

<p>When you get our <a href="https://better.com/preapprovals/purchase">3-minute pre approval</a>, we run a soft credit check (which doesn’t affect your score). This allows Mortgage Experts like me to look at your debts and credit in more detail and get a more accurate picture of your DTI. </p>

<p>If you’re planning on buying soon, we also encourage you to upgrade to our <a href="https://better.com/content/vpal/">verified pre-approval</a>. Our underwriting team will review things like your tax returns, pay stubs, and any other documents specific to your financial situation, so we can tell you exactly how much you are qualified to borrow. This helps ensure there aren’t surprises about your DTI when you do apply for a mortgage. </p>

<h2 id="tipstoconsiderforloweringyourdti">Tips to consider for lowering your DTI</h2>

<p>[Lowering your DTI](https://better.com/content/what-percentage-of-income-should-go-to-mortgage) can have a big impact on the type of [financing you can get](https://better.com/content/how-to-qualify-for-a-mortgage). If you have some flexibility on when you plan on buying, taking time to lower your DTI (and improve your credit score) can save you a lot of money over the life of your loan.</p>

<h4 id="afewdtireductionstrategiestoconsider">A few DTI reduction strategies to consider:</h4>

<ul>
<li>If possible, pay off your car loan before applying for your mortgage.</li>
<li>If you plan on purchasing a car, considering waiting until after you’ve bought your home.</li>
<li>Start paying off your credit cards in full, one by one. (Don't close the cards after you pay them off, as this can hurt your credit score.)</li>
<li>If possible, refinance or consolidate current loans to reduce your monthly payments.</li>
<li>Consider adding a co-borrower with a low DTI to your loan (keep in mind that if they have a low credit score, it could negatively affect your financing options).</li>
<li>If you plan on using rental income, make sure you have lease agreements in place.</li>
<li>If you plan on living with a partner, parent, or roommate in your new home, talk to us about how we might include some of that income in your DTI calculation.</li>
</ul>

<h2 id="readytoexploreyouroptions">Ready to explore your options?</h2>

<p>We can help you understand your DTI and the financing options available to you. Start by getting your <a href="https://better.com/preapprovals/purchase">3-minute pre approval</a>. Then <a href="https://better.com/schedule-call?loanType=purchase&amp;TRACKINGLOCATION=iydtirdwafam&amp;TRACKINGBRANDING=purchase">schedule a call</a> so we go over the numbers with you.</p>

<p><br></p>

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<li class="footnote" id="fn:2"><p><a href="https://www.housingwire.com/articles/40382-fannie-mae-raises-debt-to-income-ratio-to-further-expand-mortgage-lending">https://www.housingwire.com/articles/40382-fannie-mae-raises-debt-to-income-ratio-to-further-expand-mortgage-lending</a> <a href="#fnref:2" title="return to article">↩</a></p></li></ol></div>

Learn how to lower debt to income ratio for mortgage approval. Understand what affects your DTI ratio, why it matters, and how to qualify for better rates.

How to lower debt to income ratio for mortgage approval

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<p><em>The Loan Estimate is intended to provide a clear and concise summary of the terms and costs associated with any loan. Here’s how to read it with confidence.</em></p>

<hr />

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<p><br><br> <br />
The Loan Estimate (LE) provides a clear and concise summary of the terms of your loan to help you understand the features, costs and risks associated with your mortgage as required by the Consumer Finance Protection Bureau (CFPB). Before moving forward with any lender, you should be sure to compare and understand your Loan Estimate.  </p>

<h2 id="yourinitialle">Your initial LE</h2>

<p>This is page 2 of sample LE in the CFPB-approved format. Make sure your lender provides an estimate in this format. Anything that looks different is not an official Loan Estimate.</p>

<p><a href="https://better.com/start"><img src="https://media.better.com/content/prod/2016/12/LE-page-2-no-annotation.png"></a> <br />
<em><p style="font-size:1.4rem;">Page 2 of the LE details your loan costs</p></em></p>

<h2 id="tipsforcomparinglesfromdifferentlenders">Tips for comparing LEs from different lenders</h2>

<p>Here are a few things to look out for: </p>

<h4 id="1thirdpartyfeesappearingononelendersleandnotanothers">1. Third-party fees appearing on one lender’s LE and not another’s</h4>

<p>You should raise this with your Mortgage Expert. While the fee amount can vary, the types of third-party fees associated with a loan are fairly constant. One lender may be missing something. </p>

<h4 id="2differencesinloanamountforarefinance">2. Differences in loan amount for a refinance</h4>

<p>A lender may increase your loan amount slightly to create a “<a href="https://better.com/content/no-cost-mortgage/">no closing cost loan</a>”. Borrowing a little more than the payoff on your current loan is one way to offset fees at the closing table, but this is increasing your debt to pay for your closing costs; it does not make them go away.  For an apples-to-apples comparison across lenders, you should get LEs with identical loan amounts.</p>

<h4 id="3promisesofcreditsafterclosethatdonotappearonthele">3. Promises of credits after close that do not appear on the LE</h4>

<p>This is a major red flag. The purpose of the LE is to create transparency and accountability. You lose both by transacting outside of the standard disclosure.</p>

<h4 id="4increasingcostsduringachangeincircumstance">4. Increasing costs during a change in circumstance</h4>

<p>Some lenders may advertise attractive rates and fees for one product, then switch into something less competitive (<a href="https://better.com/content/loan-estimate-101/">bait-and-switch</a>). You should ask about any additional fee and look at the relative competitiveness of the new product by continuing to shop before locking.</p>

<h2 id="abetterway">A Better way</h2>

<p>Better Mortgage is committed to a transparent and efficient mortgage process. Contact us by email (<a href="mailto:hello@better.com">hello@better.com</a>), phone (<a href="tel:888-501-3186">888-501-3186</a>), or chat with us via <a href="https://better.com/">Better.com</a> with any questions about your LE. We are happy to walk you through competing offers and answer any questions. No pressure, no sales — just a fast, easy and transparent process.</p>

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Your loan estimate is a summary of the terms and costs associated with your loan. Learn how to read and understand it with confidence.

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