(May 3, 2019) Owning a vacation home is part of the American dream for many people – the ability to have a place they can escape to for relaxation from work and a place to make memories with family and friends.
The odds are you didn’t win a billion dollars playing Powerball, so you want to be sure you are not being too risky financially by investing in a second home, whether that home is here at the beach, on a lake or near a ski resort.
In order to qualify for a second home purchase, you need to show that you are a good bet as far as getting a mortgage on a property is concerned, because statistically people would default on a second home mortgage before they would on a primary home.
Two of the most important factors for lenders when reviewing your file are: debt-to-income ratio and credit score.
Debt-to-income ratios are calculated by dividing your total debt per month by your gross monthly income. They take into account all expenses such as existing mortgage, the new mortgage, car payments, credit card payments, etc.
The rule of thumb for a second home purchase is around 43 percent debt-to-income ratio, but there are approvals available up to 48-49 percent. It depends on credit score, loan-to-value ratio of the loan and the client’s reserves.
It’s also tough to pinpoint an exact credit score that will get a second home deal done. Scores in the higher 600s may qualify, but in order to get the best interest rate offers, most lenders want to see credit scores above 700.
As far as a down payment on a second home purchase, loans are available with as little as 10 percent down, but most buyers choose to put 20-25 percent down to allow for the best loan product and rate.
There are guidelines in place from Fannie Mae on second home loans such as: must be occupied by the borrower for some portion of the year; restricted to one-unit dwellings; must be suitable for year-round occupancy; can not be a timeshare arrangement.
Separate from Fannie Mae’s guidelines, most lenders want to see a second home a “reasonable” distance from your primary, and that number is generally considered to be 50 miles.
The next option is to apply for an investment property loan, which requires the highest down payment and carries a higher interest rate.
In addition to the financial side of the coin, also give good thought to whether you are ready for the upkeep of a second home, the additional payment, and being tied to one location for your vacations.
— Lauren Bunting is a licensed Associate Broker with Bunting Realty, Inc. in Berlin.