Financing a Second Home or Rental in Ocean City, NJ: What to Know Before You Apply

Many Ocean City homes are second homes, and many of them are rented for part of the summer. That mix of personal use and rental income is exactly where shore buyers get tripped up on financing. Before you apply, it helps to know how a lender will classify the house, because that choice affects your down payment, your rate and whether rental income can help you qualify.

Second home or investment property?

Lenders sort every mortgage by how the home will be used. For loans sold to Fannie Mae, which covers most conventional mortgages, the two categories a shore buyer usually falls into are:

Second-home loans usually carry better terms, so most Ocean City buyers aim for that category. The catch is rental use. Under Fannie Mae's rules, a second home can still earn some rental income, but that income cannot be used to qualify for the loan, and the home cannot be under an agreement that hands a management company control over occupancy. If you plan to rent heavily, or to have a company run the bookings, tell your lender at the start so the loan is set up the right way.

Duplex condos and two-unit homes

Much of Ocean City is up-and-down and side-by-side duplex condos. Buying one unit in a duplex is a one-unit purchase, which can fit second-home rules. Buying a whole two-family building is a two-unit purchase, which does not qualify as a second home under Fannie Mae's guidelines, so expect investment-property terms unless it will be your main home. Your lender may also review the condo association: its insurance, its budget and any rental rules in the master deed.

Qualifying for two homes at once

For a second home, the lender counts the full cost of both homes: your current mortgage and taxes plus the new shore home's payment, taxes, insurance, flood insurance and any condo fees. Lenders also often want to see more cash in reserve than for a first home. Get preapproved with your actual shore-home costs, not just the price. Our guide to what it costs to own a shore home covers flood insurance and taxes.

Taxes to plan for

• Rental income and personal use. If you rent the home for fewer than 15 days a year, the IRS says you do not report the rent or deduct rental expenses. Rent it more and you report the income and split expenses between rental and personal days. If your own use is more than 14 days, or more than 10% of the days it is rented, whichever is greater, the IRS treats it as a residence, which limits rental deductions. Talk with your accountant before you set your rental calendar.
• No state property tax relief. New Jersey's ANCHOR, Stay NJ and Senior Freeze programs apply only to your principal residence. A vacation home, second home or rental does not qualify.
• Rental licensing and taxes. Ocean City requires a rental license and an in-person inspection before you rent, and platform bookings carry state taxes and a city fee. See renting out your Ocean City home.

Questions to ask your lender

• Will this home qualify as a second home if we rent it some weeks in summer?
• Can any of the expected rental income help us qualify?
• What down payment and reserves do you need for a second home versus an investment property?
• Will the condo association need to be reviewed, and how long does that take?
• Is the home in a flood zone that requires flood insurance, and has that been priced into my payment?

Sources: Fannie Mae Selling Guide B2-1.1-01, Occupancy Types; IRS Topic 415, Renting residential and vacation property; NJ Division of Taxation, property tax relief FAQ. Loan programs and lender requirements vary; this is general information, not lending, legal or tax advice.