When I joined the Temecula Valley and the mortgage business in 1993, this was a very different place. We were largely a rural-to-suburban commuter area. People lived here because they could buy more house than they could in San Diego or Orange County and commute to work. My father bought here in 1993, commuted to El Segundo and later Fullerton. A bigger home, better schools, new home, and new community – is what drew him here.
Today, the Temecula Valley has evolved into a destination valley—wineries, golf, restaurants, casinos, entertainment, and tourism have made this an attractive place to live, visit and own a second home. Additionally, it has also attracted investors to the wine country and other areas that allowed STR’s. Although areas have cracked-down on these the last 5 years.
That evolution makes understanding occupancy increasingly important.
There are three primary occupancy classifications:
1. Primary Residence
- Where you live most of the time.
- Typically where you spend at least 51% of your time.
- Generally where your driver’s license/ID, tax filings, mail and other records point.
- Usually requires the lowest down payment.
- Typically receives the best interest rate.
- Conventional, FHA and VA financing are primarily designed around primary residences.
- FHA and VA generally require the property to be owner-occupied.
HOA and property type still matter, but occupancy is one of the first questions underwriting must answer.
The Federal Housing Administration’s current handbook defines a principal residence as the borrower’s permanent place of abode that is typically occupied for the majority of the calendar year. FHA also generally requires at least one borrower to occupy the property within 60 days and intend to continue occupancy for at least one year.
HUD FHA Single Family Housing Policy Handbook
VA has its own occupancy requirement. A Veteran obtaining a VA-guaranteed loan must intend to personally occupy the property as their home, generally within 60 days of closing, subject to VA’s reasonable-time provisions.
VA Lenders Handbook — Occupancy Requirements
2. Second Home
This is where the Temecula Valley has changed dramatically.
A second home is generally a property you occupy for part of the year—not an investment property you purchase primarily to generate rental income.
- Usually requires more money down than a primary residence.
- Generally receives a higher interest rate than a primary residence.
- Typically cannot be located in the same city, ZIP code or immediate market area as your primary residence under conventional second-home guidelines.
- It should make sense as a legitimate second-home or vacation destination.
- Historically, it was harder to make the argument that Temecula was a true second-home destination.
- Today, I believe that argument is much easier to make.
Think beach communities, mountain destinations, Palm Springs—and now, in my opinion, Temecula Valley Wine Country.
One important caution: second-home financing is not intended to be a disguised investment property. If the property is primarily being purchased for rental income, underwriting may classify it as an investment. Qualifying for a 2nd Home requires the primary residence PITI + the proposed 2nd Home PITI = total housing expenses with no rents to off-set.
Fannie Mae’s current occupancy guidance requires a second home to be occupied by the borrower for some portion of the year, be a one-unit dwelling, be suitable for year-round occupancy and remain under the borrower’s exclusive control. Fannie Mae also states that rental income identified from the property cannot be used for qualifying purposes.
Freddie Mac similarly requires the borrower to occupy the second home for part of the year and keep it available primarily—more than half of the calendar year—for personal use and enjoyment. Freddie Mac also permits certain short-term rentals when its specific requirements are met.
Freddie Mac — Second Home Mortgage Requirements
3. Investment Property
An investment property is purchased primarily for income or appreciation rather than personal occupancy.
- Generally requires the highest down payment of the three.
- Sweetspot is usually 25% down
- Usually carries a higher interest rate than a primary residence.
- Reserve requirements are often higher.
- Property taxes, insurance, HOA dues and other obligations still affect qualifying.
- Rental income can potentially be used for qualifying, subject to the specific loan program and documentation requirements.
- Conventional financing has specific rules for how rental income is calculated and documented.
- STR rents are allowed, where STR’s are allowed.
Fannie Mae defines an investment property as property owned but not occupied by the borrower and applies additional pricing adjustments to investment-property mortgages.
Fannie Mae — Investment Property & Occupancy Guidelines
Freddie Mac’s current rental-income guidance allows qualifying rental income from subject 1- to 4-unit investment properties and certain non-subject investment properties. Rental income from a second home, however, may not be used as stable monthly income.
Freddie Mac — Rental Income Requirements
Our local market is somewhat unusual because we have relatively few traditional 2-, 3- and 4-unit properties compared with other markets. There are some in Hemet and areas north of the Valley, and we will tackle those properties in a future article.
Why Are the Rates and Down Payments Different?
It is all about risk.
Imagine I own a primary residence and an investment property. I fall on hard times, and my investment-property tenant stops paying rent.
I now have two mortgage payments.
Which property am I more likely to protect?
My primary residence.
Most people will scrape and claw to keep the roof over their head—the home where they sleep every night.
That is one reason investment properties generally carry more risk and therefore require more equity and higher pricing.
Second homes fall somewhere between primary residences and investments because the borrower has another primary home. If finances become difficult, the second home may receive less financial priority than the primary residence.
There is also the property-condition risk. In my opinion, an owner generally takes better care of the home they live in than a percentage of tenants may take care of a property they rent.
The GSE guidelines reflect this risk-based approach. Fannie Mae applies loan-level price adjustments to both second homes and investment properties, with an additional adjustment specifically applicable to investment properties.
Freddie Mac’s guidelines likewise distinguish primary residences, second homes and investment properties in areas including credit, reserves, LTV and rental-income treatment.
The Bottom Line
The Temecula Valley has changed from a commuter community into a destination.
That makes second-home financing much more relevant today than it was in 1993.
But classification matters.
Primary, second home and investment property are not interchangeable. Each has different down-payment requirements, interest-rate pricing, reserve requirements and rules regarding rental income.
Understand what the property really is, understand what underwriting is looking for, and understand how that classification impacts the numbers.
Ultimately, mortgage financing is about risk—and occupancy is a major piece of that equation.
