5 Tips on Qualifying for a Second Home Mortgage
As we go into the New Year it’s time to set goals. If one of those goals is buying a second home or vacation home, I suggest you read 6 Questions to Ask Before Buying a Second Home .
Once you have determined what kind of home you are going to invest in, the next part of the process is finding financing.
Here are the five mostly commonly asked questions when it comes to financing a second home:
What is the minimum down payment needed for a second home mortgage?
That will depend on the lender, of course. Fannie Mae requires at least 10 percent down for a second home purchase.
That is compared to the three and half percent minimum requirement for primary residences. Most buyers of a second home have a tendency to make higher down payments, often wanting to keep the monthly payment as low as possible.
What’s needed to qualify for a second home mortgage?
It’s not only the buyer that has to qualify, but also the property. Lenders want to make sure that the property is truly a second home.
The location of the property (mountains or beach for example) and distance from the buyer’s primary residence will be two of the biggest factors the lender will use to determine if the property is truly a second home.
According to Cori Dailey of PRMG, most lenders require a distance of at least 50 miles from the buyer’s primary residence.
Reserve requirements are a consideration as well. Different lenders have different requirements that can range from two to six months of reserves.
Also, the standard qualifications such as debt to income ratio, credit score and income verification will apply. Lenders often have more strict guidelines for a mortgage on a second home and the evaluation process of the application can also be more difficult.
What are interest rates like for a second home mortgage?
The interest rate typically offered by a lender will take a couple of things into consideration:
- Amount of reserves
- Terms of the loan
At a minimum, the interest rate will tend to be a quarter of a point higher than a traditional mortgage on a primary residence.
What are the total costs in buying a second home?
The standard loan and closing costs apply just as they do for any real estate transaction. There could be an increase in cost for insurance, for example.
Why would insurance be more expense? Here are a few reasons:
- Vacation homes are usually located in mountain or coastal communities where there tend to be more natural hazards.
- Vacation homes may have more maintenance issues.
- Vacation homes are vacant much of the time which can make them susceptible to vandalism.
What is tax deductible on a second home?
If the home is strictly used as a second home, all interest on the mortgage is deductible as well as the property taxes.
Always check with your tax advisor to see how this fits into your personal tax situation.