Whether you’re buying your first home, a vacation home, or an investment property, a mortgage is often the only way to make it happen. But depending on the property type, getting a mortgage isn’t always easy. Sometimes, it isn’t even an option.
Sometimes, the properties you can use a mortgage on are restricted. Lenders don’t offer mortgages on every property type. Before offering a loan, they use various criteria to assess risk—the likelihood of the borrower repaying the mortgage.
Property type matters when shopping for a mortgage, and it might make qualifying tricky.
In this guide:
Why do lenders only grant mortgages on certain types of properties?
Lenders limit properties you can use a mortgage on for several reasons. In general, it comes down to risk: Lenders are more likely to offer financing when there’s less risk of the borrower defaulting.
From a lender’s perspective, factors that affect a property’s riskiness include:
- Whether it’s a primary, secondary, or investment property
- Whether it has shared common spaces (for example, in the case of a condominium)
- Whether the borrower owns a specific dwelling or just the right to occupy a dwelling
With certain property types, other people’s actions can affect your property value. For example, if you own a condo, you don’t own the building your unit is in or any shared space. But outside forces can affect your property’s value, so the lender takes on more risk.
An even riskier scenario for a lender might be financing a co-op, where a resident owns the right to live in a unit but not the unit itself.
Most lenders feel more confident financing a single-family home and primary residence. In this case, the borrower lives in the house and maintains the entire property.
What properties can you use a mortgage on?
When applying for a mortgage, remember that not all lenders finance every property type. We’ve researched common property types and associated restrictions on mortgages.
Primary residence
You’ll often have an easier time getting a mortgage on a primary residence than a secondary or investment property. Many lenders feel more confident lending to a property owner who will be living in and maintaining the home full-time.
Mortgage rates on primary residences are often lower than other property types. A primary residence could be one of several property types—for instance, a condo, a townhouse, or a single-family home. This will also affect mortgage rates.
Secondary residence
You can get a mortgage on a secondary property, but your interest rate might be higher than on a primary residence. You may also need a larger down payment or a higher credit score to qualify.
Secondary homes often must meet the following criteria to qualify for a mortgage:
- Must be a single-unit property
- Must be suitable for year-round residence
- Owner must have exclusive use of the property
- Owner—not a property management company—must manage the home
- Secondary home must be a certain distance away from the primary residence
A secondary residence is riskier for lenders because it’s likely to sit vacant for a portion of the year. Plus, owners are likelier to default on a loan if they’re not dependent on the property as a place to live.
Investment property
An investment property is a property you intend to rent out to tenants to generate income. It’s more challenging to get a mortgage on an investment property than on primary and secondary properties.
Lenders view investment properties as riskier than primary or secondary properties because, at any given time, they’re vacant or tenant-occupied. Non-owner-occupied properties look riskier to lenders because owners are often more mindful about maintaining them than tenants.
Plus, like a second home, owners are more likely to default on an investment property than the home in which they live.
You can get a loan on investment property, but you’ll likely face higher rates, need even better credit, and have to put more money down to qualify.
Construction home
A construction home, or a new construction home, is one in which the owners are the first to live. When you’re building a house from scratch, there’s more to financing than a traditional mortgage.
Instead of applying for a traditional mortgage upfront, you’ll need a construction loan to finance the building process. Then when your home build is complete, the lender will convert your loan to a regular mortgage.
Construction loans can take a lot of work to get. They often have higher interest rates due to higher risk. To qualify, most borrowers should be prepared with the following:
- A 20% down payment
- The builder they plan to work with
- Building plans and blueprints
- Estimated costs for the home build
Manufactured home
Many people confuse manufactured homes with modular homes. Both are factory-built and then transported to a property.
You can distinguish between the two based on whether the house has a U.S. Department of Housing and Urban Development (HUD) tag: Manufactured homes do, and modular homes don’t. Modular homes also sit on foundations, and most manufactured homes don’t.
Manufactured homes can be difficult to finance due to the lender’s risk. Manufactured homes don’t need to meet the same building codes and requirements as traditional homes, making them riskier to lenders.
However, you might qualify for a mortgage if your manufactured home sits on a foundation and is on a piece of land you own.
Condominium
A condominium, or condo, is a unit you own within a building or community that houses other private units. You own the interior of your unit but not the exterior or shared areas. In exchange for a fee, a condo association manages rules, regulations, and maintenance of common areas.
You can get a mortgage on a condominium, but it’s not as straightforward as financing a single-family residence.
Because the owner of a single unit has no control over much of the property, mortgaging a condo can be difficult. Lenders won’t just look at your finances; they’ll also consider the finances and management of the entire condo community.
Because of this added risk, rates may be higher than those for single-family homes.
Co-op
A co-op, or cooperative, is a property owned by a legal entity. When you buy a share of the co-op, you become an owner, which gives you the right to occupy a unit within the building. Unlike other property types, you must be approved by the co-op’s board to buy in.
When you buy into a co-op, you’re not purchasing a specific unit, so many lenders won’t finance co-ops. But where co-ops are more common—typically in the eastern U.S.—you may be able to find a co-op mortgage.
Townhouse
A townhouse (or townhome) is a single-family unit that shares a wall with another. Unlike condominiums, townhome owners own the interior and exterior of the unit.
Because the owner of a townhouse owns the dwelling and the land under it, financing is straightforward. With ownership of the interior and exterior of the property, getting a loan for a townhouse is similar to financing a standalone single-family home.
Apartments
Depending on how you define “apartment,” you may or may not be able to get a mortgage on one.
Some people define “apartment” as a rented unit, in which case a mortgage wouldn’t apply to individual residents. Of course, you could get a mortgage on an entire apartment building if you plan to use it as an investment property.
However, some people use “apartment” interchangeably with “condominium” or “co-op.” As we mentioned above, you can get a mortgage for these property types, but it won’t be as straightforward as it would be for a single-family home or townhouse.
What are the best and worst property types to get a mortgage on?
The best properties you can get a mortgage on are the ones that make it easy to qualify with a low interest rate. This often means your primary residence, as opposed to a second home or investment property.
Primary residences that are the least risky from a lender’s perspective—for example, single-family homes without common spaces or shared property rights—are the best to get a mortgage on.
The most challenging properties to get a mortgage on are investment properties, where the owner has less control over the property and a higher chance of defaulting. Plus, certain property types—even if they’re primary residences—can present financing challenges, including:
- Condominiums
- Co-ops
- Manufactured homes
These property types, plus others with common spaces, shared ownership, or less stringent building codes, can seem risky to lenders, making it harder to get a mortgage.
