A primary residence mortgage is used to buy your main home. Here’s how it affects borrowing and taxes

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  • A primary residence is where you live most of the time.
  • It’s different from a second home or an investment property, since you might not live there full time.
  • The type of property matters when you’re taking out a mortgage and filing taxes.

Whether you’re buying a home for the first time or the fifth, it can still be a massive undertaking.

It’s important to know what type of property you’re planning to buy, whether it’s a primary residence, a second home, or an investment property. The difference between them matters for financing. If you’re planning to take out a mortgage to buy your primary residence, you’ll need to know how to qualify.

How to qualify for a primary residence mortgage

When browsing different financing options for a primary residence, you might qualify for government-backed loans, like FHA, USDA, or VA mortgages. These types of home loans require very little or no money down. In some cases, there are low minimum income requirements.

“For most home buyers, purchasing a home as their primary residence will afford them the most favorable terms when it comes to the type of mortgage loan, interest rate, down payment required, length of the loan, and qualifying” for the loan, says Jackie Boies, senior director of partner relations at Money Management International.

“Lenders view a primary residence as the least risky for them because a homebuyer is more likely to maintain (even improve) the home they live in and keep the mortgage payments up to date,” Boies says.

According to the IRS, a primary residence is:

  • Your main home, or where you spend the majority of your time
  • Near where you work, bank, attend school, visit recreational clubs, or take part in other community endeavors
  • Where other family members also live as their primary residence

Refinancing your primary residence mortgage might have different requirements. Since you already own the home, you’ll still need to show proof of income, but having equity in the home could serve as leverage, meaning your credit score might not have as much of an impact. But it depends on your lender, how long you’ve owned the home, and other factors that are up to the bank you’re refinancing with.

Primary residence vs. second home vs. investment property

“Your primary or principal residence is the one you consider ‘home’ and where you live most of the time,” Boies says. “A second home is one where you spend some time, or perhaps consider your vacation home. An investment property is one that you don’t plan to live in and expect to rent, lease, or flip.”

Below are the biggest distinctions between these three types of properties:

Primary residence

Second home

Investment property

  • Where you live most of the time>

  • Can exclude capital gains tax when selling this type of home

  • The address where you’re registered to vote

  • The address that matches your driver’s license

  • Where you vacation or visit occasionally
  • Not used or lived in the majority of the time
  • Might be rented out or shared with family throughout the year
  • Might use as a secondary residence for work
  • You earn money off of this property — used as a vacation rental or rented out for others to live in
  • Financing has a higher barrier since it’s not a primary residence
  • You might earn money off of this property by flipping it

Even if you split your time between your primary residence and second home, you can only have one primary residence. This matters at time since you can reap the tax benefits for primary home loans.

“You may qualify for a deduction of the mortgage interest you pay, plus an exemption from capital gains tax on your profits if you sell your home in the future,” Boies says. “Income derived from an investment property is reportable and taxable. Properly reporting the income allows you to also offset earnings with the expenses associated with the property.”

Benefits of a primary residence mortgage

A primary residence mortgage might be the easiest home loan to qualify for. Here are some of the benefits.

Make a smaller down payment

Conventional and government-backed loans are much friendlier toward primary residence borrowers compared with second home and investment property borrowers. You may not need to have a down payment, or if you do, it might be a small amount — usually 3.5% to 5% of the purchase price.

For second homes and investment properties, you might not qualify for a loan unless you put down 20%. While you get to skip out on private mortgage insurance (PMI) with a full 20% down payment, you’ll need to have that cash on hand in the first place.

Qualify for a lower interest rate

Interest rates on mortgages for investment properties tend to be higher compared with primary residences. Lenders favor primary homeowners because they want more people to take out home loans. Investment properties aren’t available to everyone, which means they are more exclusive.

The better your credit score, credit history, and debt-to-income ratio, the more likely you are to secure the lowest interest rate offered by a lender. If you own multiple properties with debt, you have a higher barrier to showcase you can comfortably afford to make payments on a new loan. Because of this, you might not get the lowest interest rate offered.

Deduct mortgage interest on your taxes

For primary residences, you can deduct the interest you paid on your home each year up to the first $750,000 of indebtedness. In most cases, all of your mortgage interest qualifies. Secondary homes might also be eligible.

Investment properties don’t usually qualify for this tax break.

Frequently asked questions

What’s the difference between a primary residence and a second home?

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A primary residence is where you spend the majority of your time. You might have a second home that serves as a vacation home or one you visit regularly, but it’s not the place you spend the most time.

How do banks define primary residence?

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Your primary residence is where your voter registration and driver’s license are linked to. It’s where you spend most of your time and it’s often associated with activities you take part in around the community, such as religious groups and recreational clubs.

Can I have two primary residence mortgages?

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Even if you evenly split your time between two homes, you need to claim only one as your primary. There’s no such thing as two primary residences when you obtain a mortgage.

The bottom line

Your primary residence is where you live most of the time. Not everyone can afford a second home or an investment property. Banks tend to favor those exploring mortgage options for a primary residence, which means the barrier for qualification is often lower compared to other types of mortgages.