I am currently looking at a two-family home that is for sale for $180K. I would like to convert this to a bed and breakfast but am having trouble finding out what type of financing to use. We would not be living on the property and currently have another mortgage for around $239K (property recently appraised by bank for $380K). Based on my husband's salary alone we could qualify for a $500K mortgage and I am also working (might still with the B&B, possibility of my mother running it). These are three mortgage options I see right now:
(1) 2nd home/vacation home - It looks like you qualify for these basically by taking your income and seeing if you qualify for both your primary residence mortgage and the secondary one together. The benefits of this would be that we do not have to submit any type of business paperwork/financial statements and would probably be the best rate. This would require the bank not knowing that we plan to convert it to a bed and breakfast. I don't see what harm this does to the bank because instead of there being no potential for income with a 2nd home/vacation home, there is a potential if it is a bed and breakfast. And it would basically just be a single family home again so it's not like the market value would decrease. Also of note, the property is around 38 miles away from my primary residence which may be a factor.
(2) Investment property - This is what the property currently is and would be purchased as. Again, the benefits are that we do not have to submit any type of business paperwork/financial statements and would get a better rate than a commercial loan. Although we plan to turn it into a bed and breakfast, that is not what it is currently but when I mentioned B&B on the phone to a financial institution, they immediately said it's a commercial loan and they don't do those. Again, I don't see much harm in this to the bank. There is still the potential for income (albeit, much more risky than as apartments). However, the market value of the property would not decrease. If anything it would increase because it would be much nicer than when purchased.
(3) Commercial loan - I really hope it doesn't come to this. It would require a lot of extra paperwork, much worse terms, and I'm not even sure it's possible. If it is not currently a bed and breakfast how are they going to evaluate the financials? They probably wouldn't even make a loan even though it is backed by the value of the real estate.
Please note, I'm not trying to trick the banks. It just seems like if we can qualify for a $500K primary residence right now, why can't we qualify for the additional $180K we would need that also has the potential for some income? Any and all advice is appreciated.
(1) 2nd home/vacation home - It looks like you qualify for these basically by taking your income and seeing if you qualify for both your primary residence mortgage and the secondary one together. The benefits of this would be that we do not have to submit any type of business paperwork/financial statements and would probably be the best rate. This would require the bank not knowing that we plan to convert it to a bed and breakfast. I don't see what harm this does to the bank because instead of there being no potential for income with a 2nd home/vacation home, there is a potential if it is a bed and breakfast. And it would basically just be a single family home again so it's not like the market value would decrease. Also of note, the property is around 38 miles away from my primary residence which may be a factor.
(2) Investment property - This is what the property currently is and would be purchased as. Again, the benefits are that we do not have to submit any type of business paperwork/financial statements and would get a better rate than a commercial loan. Although we plan to turn it into a bed and breakfast, that is not what it is currently but when I mentioned B&B on the phone to a financial institution, they immediately said it's a commercial loan and they don't do those. Again, I don't see much harm in this to the bank. There is still the potential for income (albeit, much more risky than as apartments). However, the market value of the property would not decrease. If anything it would increase because it would be much nicer than when purchased.
(3) Commercial loan - I really hope it doesn't come to this. It would require a lot of extra paperwork, much worse terms, and I'm not even sure it's possible. If it is not currently a bed and breakfast how are they going to evaluate the financials? They probably wouldn't even make a loan even though it is backed by the value of the real estate.
Please note, I'm not trying to trick the banks. It just seems like if we can qualify for a $500K primary residence right now, why can't we qualify for the additional $180K we would need that also has the potential for some income? Any and all advice is appreciated.
