Rules for Buying a Non-Primary Home

Lenders normally require bigger down payments on rentals and second homes than on primary residences.

Lenders normally require bigger down payments on rentals and second homes than on primary residences.

You can buy a non-primary residence and use it as a rental property or a home-away-from home vacation destination. You may also buy a second home if your work requires you to spend long periods of time in another part of the nation. Rules pertaining to taxes, insurance and mortgages for non-primary homes are very different from those that apply to your principal residence.

Mortgage

Lenders view loans tied to second homes and investment properties as risky when compared with primary residence loans. If you run out of cash, you're more likely to pay your primary home's mortgage than the loan that secures your holiday home. Consequently, interest rates on loans for non-primary homes are usually higher than those on primary residences. You also must make a bigger down payment. On a primary residence loan, government-sponsored enterprise Freddie Mac requires a down payment of just 5 percent. On a second home or vacation property, you must make a down payment of at least 15 percent.

Insurance

Property insurance laws vary between states, but if you buy an investment property you may be required to buy a landlord's insurance policy rather than a regular homeowners policy. On the plus side, you don't have to pay for contents insurance. If renters want their belongings insured they must pay for the insurance themselves. On the minus side, landlord policies cost more than standard homeowners policies. You may also need to buy liability insurance to protect you in the event that your renters sue you.

Tax

If you finance the purchase of a second home or vacation property, you can claim an income tax deduction for the mortgage interest payments and property tax. If you rent the property out for no more than 14 days per year you don't have to pay income tax on the rental income. If you rent the home throughout the year you can't claim the tax deduction unless you actually stay in the home for the greater of 14 days or 10 percent of the time that you rent it out. Additionally, you have to pay income tax on your rental income. On the other side of the coin, if the home is an actual rental property you can claim tax deductions for depreciation and maintenance costs.

Property Tax

In some states -- such as Texas and Florida -- you can file a homestead exemption on your primary residence, which means you don't have to pay property tax on the full value of your home. For vacation homes and rental properties you get no such tax break. Even if your non-primary home is worth less than your principal residence, homestead rules may result in a higher tax bill for the non-primary home.

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