Entertaining the possibility of buying a second property is a milestone in and of itself. There's no doubt that – depending on how the property is used – reaching repeat homeowner status could mean additional income. But whether you choose an investment home versus a second home can impact how it's financed, the costs, and the tax savings. Mulling over which to choose? To help you land on the best choice, let's dig into key distinctions between the two.

Second home vs. investment property: Mortgage requirements

Generally speaking, the mortgage requirements for a second home and rental property tend to be more stringent than those for a primary residence. And while it depends on the lender, the minimum credit scores are higher and the down payment requirements steeper for an investment property than for a secondary residence.

While you usually can't take out an FHA loan for a second home or an investment property, there are specific scenarios where you can. For example, if you're uprooting for work and want to do a swap of sorts – and use your second home as your primary residence and your first home as your new abode.

The lending criteria and rates for a second mortgage tend to be steeper because, for the lender, these are riskier. For one, because you're bumping up your debt burden, should you be financially strapped, it will be harder for you to stay on top of your monthly mortgage payments for that second mortgage.

When you take out a second mortgage, in the case of foreclosure that loan is paid off second, after your first mortgage for your first home. In the case that there's not enough equity in both homes to pay off the loans in their entirety, the lender may not recoup the amount borrowed.

Having a clear knowledge the mortgage qualifications can help you be well-prepared – and have your financial ducks in a row so you can successfully navigate the process of landing another mortgage.

Second home vs. investment property: Tax implications

Another important financial consideration to weigh when deciding whether to invest in a second home or investment property are the tax deductions available.

For second homes, it's classified under the IRS as a personal residence. As a result, you generally can take the mortgage interest deduction, property tax deduction, and deduct mortgage interest.

If you have an investment property, it's categorized as a business expense. And all rental income is treated as regular income – just like income from a day job or side hustle. In turn, per the IRS rental income must be reported on your tax returns.

The advantage here is that eligible expenses can be deducted from your rental income and you get to enjoy the tax benefits. Expenses that can be written off typically include repairs, utilities, maintenance, insurance, advertising, travel and related expenses, and management fees.      

Here's the overlap with an investment property: If it's rented out for part of the year (remember: It can't be more than 14 days a year), you can claim rental property deductions, but only for the part of the year it's being rented out.

 To better get your head around the tax implications, check out our handy guide below, for a side-by-side glance:

How to finance your investment property or second home

If you're mulling over whether to get a second home or an investment property, it's important to carefully think through the potential long-term economic gains and risks for each property type. As it goes, there are pluses and minuses for your second home or investment property.

For both, you can potentially enjoy additional, regular income, tax breaks, and appreciation for both property types.

And if you're leaning toward purchasing an investment property, you'll need to factor in the higher mortgage rates, minimum credit scores, and financial criteria like a higher down payment. You'll also need to consider additional costs like landlord or rental property insurance, maintenance costs, and so forth. However, you'll reap the benefits of netting tax breaks from rental properties.

With a second home, you'll likely have an easier go of finding more options for financing than if it were an investment property – conventional loans, jumbo loans and FHA loans (in special circumstances) are fair game. Whereas with an investment property, you typically can only take out a conventional loan or a non-owner occupied mortgage, which is a type of conventional loan.

You can also take out a home equity loan to buy another house or a HELOC to put toward a down payment for both a second home or an investment property, which can help you secure larger amounts of funding upfront. Plus, as you're tapping into the equity in your first home, the lending process might be easier, and you can scoop up lower interest rates.

As a second-time home buyer, while you're no stranger to the general homebuying process, being well aware of the nuances – and financial responsibilities and risks – can help you decide how to stomach the additional expenses.

If you don't have a lot to toss toward a down payment, it will be more challenging to purchase a second home without a down payment – but it's not out of the question.

The bottom line: Making the right choice

No doubt, it's a great place to be in a position to buy a second property. When it comes to which is best, it largely hinges on what you're looking for – and what you'd want to use it for.

A second home could be a better fit for you if you prefer another place to nest for at least part of the year, with the possibility of raking in a bit of additional income. An investment property can be a bigger boon to your rental income, and also comes with a separate set of tax obligations and breaks.

Knowing the financial gains and obligations of both can help you figure out your financial goals and sync your choices with your lifestyle needs.

A quick note: This might go without saying, but misrepresenting an investment property as a second home to secure better loan terms is mortgage fraud. As such, it's punishable by hefty fines – one could even be subject to an FBI investigation.

With modern technology, lenders use digital verification tools and random site visits to detect fraud, and unapproved changes in property use can trigger loan acceleration or full repayment.

If you have any questions or need guidance on the legal ins and outs of buying property, consider consulting with a real estate attorney. And if you're ready to buy a home, you can also get in touch with the Home Loan Experts at Rocket Mortgage.