Do you have your eye on a summer retreat, or winter getaway spot? Looking to expand your property portfolio with a second home the whole family can enjoy? With mortgage rates low and home prices looking set to skyrocket in the near future, now might be the best time to make good on your aspirations.
Of course, the biggest obstacle to making that dream purchase is securing the necessary financing. Before you embark on the lengthy process of obtaining a second mortgage, you should be aware of the additional financial constraints that a new housing loan will place upon you.
Unfortunately, FHA-insured loans are not available on second home purchases. These government-backed instruments offer qualifying homeowners the ability to obtain mortgages for down payments as low as 3.5%. Because these loans are only available on primary residences, prospective buyers will need to collect a larger amount of cash in hand, before they can secure necessary financing.
If you’re unable to collect the amount necessary for a more substantial down payment, there is an alternative form of financing which you may be able to avail. A Home Equity Line of Credit allows you to obtain a loan based on the built up equity already invested in your primary residence. However, be warned – only interest on the first $100,000 of these loans is considered tax deductible. In addition, HELOC loans tend to incur interest rates that are at least 1-2% higher than conventional mortgages. Also, if property prices in your area have recently fallen, lenders may be reluctant to approve a loan on a declining asset.
If you want to go the traditional mortgaging route, you’ll need to have at least a 20% down payment at hand. If you’re unable to secure financing through mainstream lenders such as Freddie Mac, then you must be willing to pay as much as 30-35% down, before you can be eligible for a second home mortgage.
While credit scores as low as 620 can qualify you for an FHA-insured loan, a second home mortgage will require a credit rating of at least 725 to 750. You must also be able to show a low debt-to-income profile in order to assure lenders that you’ll be able to meet monthly interest payments without undue strain on your finances. Significant cash reserves will further boost your chances of being approved for such a loan.
The Federal National Mortgage Association has developed some additional guidelines to differentiate second home mortgages from investment property loans. Because the latter mortgage is going towards a revenue generating activity, it will usually come with additional constraints and a higher applicable interest rate. Before approving a second home mortgage, lenders will look to ensure that your home will be used solely for personal use.
Qualifying criteria for a second home mortgage includes:
- Property must be a reasonable distance from primary residence
- Property must be occupied by the buyer for at least some portion of the year
- Property must be a one-unit dwelling
- Must be ready for year-round occupancy
- Borrower must have exclusive control over the property
- Property should not be purchased as part of a rental or timeshare agreement
- Must not be controlled by a property management firm.
Confused? Looking for Additional Information on Second Home Mortgage Requirements?
Mike Caputo has provided specialty real-estate services to home buyers across the South West Austin area for almost 20 years. He is also an accomplished property investor in his own right. No matter what the circumstances or specific considerations surrounding your second home mortgage are, Mike can help you find the most practical solutions. Call him today at 512-825-1667.