10% Down Second Home/STR Loan Not Dead/Debunking bad info

[Jeff Chisum]

Revisiting the subject of financing for vacation home/vacation rentals/STR's.

10% down is still an option without having to pay points.  

There are lenders doing loans outside of Fannie and Freddie.  Significance there is that Fannie and Freddie decided in March of 2022 that they were going to basically eliminate the 10% down option by adding high enough fees that lenders couldn't pass a fees test unless they were going to originate the loan at a loss.  With that said... there are unicorns out there where the rates are competitive without the points added.  

Revisiting the requirements of the second home occupancy loan and debunking misinformation out there.

1.  Your intention is that you will occupy the property at some point during that first years.  You will see 14 days floating around.  That's the tax lane and IRS rules.  Has nothing to do with fulfilling the mortgage requirements.  Bottom line is you can rent out on a short term basis and you don't get into a legally binding agreement during the first year where you lose the ability to occupy the property when you so choose.

2.  There is no mileage requirement.  The occupancy as a second home has to make sense if it's within a reasonable close proximity to where you live.

3.  You can have a property manager.  You just can't sign agreement where the property manager controls when you can and can't use the property.

4. You can hold title in an LLC. After clarification of the policy you can transfer title into an LLC after closing. If it is questioned you just need to be prepared to show that you haven't changed occupancy intent as a second home. If it was found that you took on a tenant after closing (within the first year) and now you are looking transfer title then yes the due on sale clause could be executed or worse. Be prepared to transfer title back into your individual name before refinancing the loan.

[Michael Baum]

Good info @Jeff Chisum. Some things in there are pretty risky (LLC etc) that I would avoid.

The mileage requirement is part of the IRS rules. Having a second home less than 75 miles from your primary residence and using it as a STR can cause issues.

[Erica Calella]

Great post, thank you Jeff! I'm wondering if I would be eligible for financing on a vacation home under the "second home" rules if I am currently renting my primary residence? I realize this is probably a trivial question, but I am getting different feedback from different sources.

[John Underwood]

I have heard that if you transfer to an LLC you could lose your title insurance that was issued in your name.

Then of course there is a remote chance they enforce the due on sale clause.

[Jon Martin]

@Jeff Chisum is there a limit to the number of days per year that it can be rented out? 

[Michael Smythe]

Distance from primary home has to make sense. 

Either 50+ miles or vacation-like amenities - on a lake or in the mountains, etc.

[Jeff Chisum]

@Michael Baum

Thanks for the feedback.

Do you have a link to the IRS rules around distance requirements? I will soon be coming out with a podcast episode around confusion when it comes to the mortgage lane vs irs/tax code lane

What is your concern around transferring title?

[Jeff Chisum]

@Erica Calella you don’t need to own a primary residence in order to utilize the 10% down second home occupancy loan

[Jeff Chisum]

@John Underwood I haven’t heard of losing title insurance as being an issue

You would want to confirm your loan has been sold to Fannie, Freddie or Federal Home Loan Bank before transferring. If so you are allowed. Better yet before the loan is originated make sure it will be sold to one of the three.

[Andrew Steffens]

I have A LOT of clients using this option.  Depending on creditworthiness rates and fees are pretty in line with other loan products.  Touching on some of the above my lender did a loan for a client who did not have a primary (lives in rented NYC apartment and purchased home in FL), and mileage is not a concern but you have to prove a reason i.e. you live in a city and the visit the beach often, you work often in subject area, mountains, etc.

[Jeff Chisum]

@Jon Martin there is no limit. You just can’t lose the ability to occupy when you want to. No long term lease agreement within the first year. You will read in the policy that it has to be available to occupy for at least half the year. That’s where understanding Airbnb and VRBO, etc… are not facilitating a legal lease agreement so you as the owner have the right to cancel. I don’t advise because you potentially could get kicked off of a platform but as the owner you are not losing occupancy control because of a legally binding agreement.

[Jeff Chisum]

@Michael Smythe

Yeah it’s more the amenities, attractions or near a family member. 50 miles plus isn’t a magic number, old policy

[Jeff Chisum]

@Andrew Steffens agree with all. We have physician clients that work in the suburbs that need to buy something close to their hospital in the case of bad weather or they need to be close to the hospital. When not there they rent it out on a short term basis.

[Jon Martin]

Quote from @Jeff Chisum:

You will read in the policy that it has to be available to occupy for at least half the year. 

Thanks @Jeff Chisum , can you expand on this? Does that mean it has to be available for my own personal use for half of the first year? Or for anyone to use? This is the rule where I worry someone could run a foul.  

[Jeff Chisum]

@Jon Martin people do get tripped up by this. By listing and accepting bookings year round for the first year doesn’t take away your ability to occupy the property when you want to. Technically it’s available for you to occupy 365 days. After the first year you are released from any restrictions.

[Michael Baum]

Quote from @Jeff Chisum:

@Michael Baum

Thanks for the feedback.

Do you have a link to the IRS rules around distance requirements? I will soon be coming out with a podcast episode around confusion when it comes to the mortgage lane vs irs/tax code lane

What is your concern around transferring title?

So regarding the distance rule, I found early that it was 50 miles from your primary if you are going to be depreciating the property and claiming deductions if renting it. I can't find it now, but that is what I remember.

Regarding the transfer of the title, I did a survey of lenders a few months ago about valuation of a working STR vs just a house and LLC title transfers.

I surveyed 10 or 12 lenders. National banks, credit unions, mortgage lenders and the like. They all said the their 2nd home loans, without exception, trigger a due on sale clause if the property is moved to an LLC. Some referred me to their commercial lending division if that was the plan.

I guess the bottom line is to check and make sure that the 10% down 2nd mortgage doesn't have that clause if you intend to move it to an LLC.

[Jeff Chisum]

@Michael Baum I double checked with a CPA that specializes in working with STR investors and he said there was no distance/mileage requirement from your primary.

I’m going to bet that most originators are not going to know the policy. As stated previously make sure you have a Fannie/Freddie or Federal Home Loan Bank loan…which if you are going with a 10% down second home occupancy loan there is a 95% chance. If you are shopping lenders that would be a question to ask. Most people undervalue working with an expert or just don’t know the importance. They just want to shop rate.

[Sarah Kensinger]

So much good good information throughout this whole thread! It's refreshing to have an expert on a certain topic come on here and share how to do things. 

[Jeff Chisum]

Quote from @Sarah Kensinger:

So much good good information throughout this whole thread! It's refreshing to have an expert on a certain topic come on here and share how to do things. 

Thank you!  So much misinformation out there.

[Sarah Kensinger]

Quote from @Jeff Chisum:

Quote from @Sarah Kensinger:

So much good good information throughout this whole thread! It's refreshing to have an expert on a certain topic come on here and share how to do things. 

Thank you!  So much misinformation out there.

Yes!!

[Aayush Jetley]

@Jeff Chisum - thanks for the great insights! 

Question - if a second vacation home is rented on STR basis after closing, what issues could arise when the insurance policy is changed from homeowner's to STR? For a conventional mortgage, at closing, the lender wants you to maintain a homeowner's policy and so I'm trying to understand the consequences of changing the policy post closing. 

Speaking to some lenders in the past, I was told that as long as you maintain a good payment history for a minimum of six payments, there shouldn't be any issue with policy updates. 

[Jeff Chisum]

Thank you for the feedback and question! My clients get a homeowners policy with a STR rider or go with a policy through a company like Proper Insurance that specializes in STR. To try and set up a landlord policy prior to closing or even shortly after closing would not be recommended. After the first year you are released from the occupancy commitment and you could place the property under a landlord policy without problems. You would just want to make sure the carrier is ok with short term rentals.

[Mya Toohey]

Thanks for the info! I specialize in investment properties. That helps since I live in a vacation town, Tampa and Clearwater area of Florida.  

[Jeff Chisum]

Would love to visit sometime.  I have a unicorn 10% down loan your clients would be interested in.