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Primary Residence Mortgage: What Is It and Why Is It Important?

TLDR

What You Need To Know

  • Banks and mortgage lenders consider your primary residence the place you moved into within 60 days of purchase and live in for most of the year
  • A primary residence mortgage usually has a lower interest rate and property tax rate than an investment property or second home mortgage
  • A residential mortgage helps you buy a home that's for personal or family use, not for use as a rental or vacation home; you can only have one primary residence

Contents

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Whether you’re new to homeownership or an old pro, there is a lot to learn when it comes to the ins and outs of a mortgage (aka the loan that gets you a home).

Before you apply for a mortgage, it’s important to research the different types of mortgages that are available and the requirements for mortgage loan approval.

There are mortgages that help you buy the house you plan on calling “home” one day. There are also mortgages for second homes, rental properties or investment properties.

For most of us, our first and most important mortgage is our primary residence mortgage. Your primary residence is the house you live in for most of the year.

Understanding what a primary residence mortgage is can be the key to getting your hands on the cash you need to buy a home, make a lower down payment and save tens of thousands in taxes when you sell it.

Do you want to know how to qualify for a primary residence mortgage? Let’s get into it.

How Do You Qualify for a Primary Residence Mortgage?

The type of house you buy can influence two things: the type of mortgage loan you apply for and what your lender will look for during the mortgage approval process.

To qualify for a primary residence mortgage, your house may need to meet requirements outlined by the IRS, such as:

  • It’s your main residence, your home. The place where you hang out the most.
  • The home address is listed on your voter registration, driver’s license and your federal or state income tax returns.
  • The home is near where you work or one or more family members.

What Are the Benefits of a Primary Residence Mortgage?

Having a primary residence mortgage opens you up to some pretty sweet homeowner and taxpayer benefits.

Lower mortgage interest rates

Lenders know that people will prioritize paying for a primary residence over other investments or loans because they want to keep a roof over their heads. For this reason, primary residence mortgages are considered low risk compared to other loans.

Because of this, you may be able to score a lower mortgage interest rate than you would if you were buying a second home or an investment property to generate rental income – and you might pay less real estate tax with a residential mortgage.

Lower down payment required

In many cases, the required down payment is lower with a residential mortgage. Lowering that down payment hurdle can help lots of borrowers get into a new home a lot faster, which is why conventional lenders can offer primary residence mortgage loans that require as little as 3% down.[1]

There are plenty of loan options available for primary residences, including conventional loans that you can get from a bank or mortgage lender as well as government-insured loans, including:

And here’s another benefit: You can usually qualify for a primary residence mortgage with a lower credit score than the qualifying credit scores for other mortgage types. The lower credit score requirement is a chance to get your feet wet in the housing market before diving into owning multiple homes or investment properties.

You can also qualify for more tax deductions than you would with second home mortgages.

Your Primary Residence and Capital Gains Taxes

If you’ve got a primary residence mortgage, you may be able to deduct some capital gains when you sell the house by taking advantage of the principal residence exemption offered by the IRS.

What is the capital gains tax?

It’s the tax the IRS charges when you sell an asset like your house. This tax, which can claim as much as 20% of your profit, is only owed when you sell an asset that increased in value while you owned it.

The IRS calculates the tax based on a few factors, including your income and net profit. While home sellers in the lowest income brackets might qualify for 0% tax on their capital gains, others could be on the hook for 15% – 20% in taxes.[2]

How can you save on capital gains with your primary residence?

The IRS will let you exclude up to $250,000 in capital gains on a primary residence if you’re single. If you’re married and filing as a couple, you can exclude up to $500,000. This is often referred to as the primary residence exemption or homestead exemption.[3]

To qualify for the primary residence exemption from capital gains, you must meet a few requirements:

  • You owned the home for at least 2 out of the 5 previous years.
  • The house has been your primary residence for at least 2 out of the 5 previous years.
  • You only claimed capital gains exclusions once every 2 years.

The 1031 exchange of property

If you’re an investment property owner, you may be able to avoid or defer capital gains taxes, too. You can do this by completing a 1031 exchange.

In a 1031 exchange, you sell your investment property and buy another one. The trick is to do both within a certain time frame. There are a few important things to keep in mind about 1031 exchanges:

  • The properties must be considered “like-kind” (read: property that is the same type) by the IRS to qualify for an exchange.
  • There’s no limit to how often you can do a 1031 exchange.

What if I Don’t Use It as a Primary Residence?

If you’re in the market for a house, an apartment or other property you plan to use while you’re on vacation or visiting family, you might be wondering if you can bend the rules a bit to reap the benefits of a primary residence mortgage.

Let’s be clear: there is no bending of the IRS rules around principal residence requirements. It would be a dangerous mistake. Lying about your primary residence is considered occupancy or mortgage fraud.

If the IRS discovers that you deliberately made false claims to your lender about the use of the residence, there’s a good chance you’ll face fines – or even jail time.

Knowing the Rules Will Make You a More Confident Buyer

Understanding what a primary residence is and what you need to qualify for a primary residence mortgage can help you feel a lot more comfortable during the home buying process.

But knowing is only half the battle. The other half is confidently using what you know to make the best money moves and decisions on your journey to homeownership.

  1. Fannie Mae. “HomeReady Mortgage.” Retrieved January 2022 from https://singlefamily.fanniemae.com/originating-underwriting/mortgage-products/homeready-mortgage

  2. Internal Revenue Service. “Topic No. 409 Capital Gains and Losses.” Retrieved December 2021 from https://www.irs.gov/taxtopics/tc409

  3. Internal Revenue Service. “Publication 523 (2020), Selling Your Home.” Retrieved December 2021 from https://www.irs.gov/publications/p523

ICYMI

In Case You Missed It

  1. There’s a good chance your lender will require a lower down payment on a primary residence than on a second home or investment property

  2. Primary residence mortgages usually come with financial benefits, like lower real estate taxes and better interest rates

  3. Even if you make a profit on the sale of your primary home, you may be able to avoid paying capital gains tax to the IRS

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