The thought of buying a second home, a place where you can relax and enjoy weekends and vacations, is very appealing to a great deal of Americans. The mounting pressures of life make wanting to “get away” paramount in a lot of people’s busy day-to-day lives. But obtaining financing for such a venture can prove a tremendous headache.
It doesn’t have to be if you arm yourself with the proper information when you are still in the planning stages of purchasing a second home.
So what do you need to know? Read on.
First of all keep in mind that from a lender’s point of view, loaning money for a second home is not the same as loaning money on a first home. The mindset of the lender goes something like this- because you already have a primary residence, if you should find yourself in financial problems down the line, you might halt making payments on the second home in order to preserve the equity on your main residence. That explains why most qualifying and underwriting guidelines are tougher when it comes to loans for vacation homes.
Another thing to bear in mind is that the secondary market, where the lender sells the second-home loan, has a completely different set of requirements for qualifying borrowers. Why is that the case? Let’s delve into this even further.
While qualifying for a second-home mortgage does tend to vary from lender to lender, the majority of second-home loans require a twenty percent down payment. This is the case for both an existing home as well as a new home that you plan to build. The twenty percent down applies to both adjustable-rate AND fixed-rate mortgages.
One of the reasons it is often difficult to qualify for a mortgage for a second home is the fact that the lender takes into consideration not only your long-term revolving and installment debt (for example car loans and credit cards) but also the payment you’re making on your first mortgage as well. This makes it tough for many individuals to qualify.
An idea to help give you the extra edge is to use the leverage tool of combining a seventy-five percent first mortgage with a ten percent down payment and ask the seller to carry back fifteen percent of the purchase price in seller financing or obtain a second mortgage from the lender. This is possible to do as the secondary market that purchases second-home loans will allow you to sidestep private mortgage insurance (PMI) for the simple reason that your first mortgage is less than the eighty percent loan generally requiring PMI. As well you can most likely save some money on interest by choosing a seventy-five percent loan over an eighty percent and negotiating the repayment terms with the seller.
So there you have it. Some valuable information to think about when contemplating investing in a second home. With these ideas in mind you should be well on your way to turning your second home dream into a reality!