Buying A Second Home
The definition of a Second Home from a lending perspective is a property that you will use for personal use, but which is not your principal residence. When you are looking to purchase a Second Home with financing, it is important to understand the difference between a Lender’s definition of a Second Home vs. an Investment Property. An Investment Property is a property owned as an investment, with the purpose of ownership being for business purposes (such as a rental property) as opposed to personal use.
Lenders underwrite Primary Residences, Second Homes and Investment Properties differently. There are different down payment requirements, interest rates, and underwriting guidelines. In many circumstances, your occupancy intention when purchasing a second home will be very clear to lenders . In other cases, perhaps if you intend to rent out the property seasonally while you are not using it or if it is next door to your existing primary residence or another investment property; the occupancy intention may be less clear to your Lender. It is a good idea to communicate with your Mortgage Banker prior to making your offer when purchasing a second home so you know up-front how your lender will interpret the occupancy and what loan terms, rates & underwriting guidelines will apply to your second home purchase.
In many cases, Foundation Mortgage will accept loan applications as a second home with some seasonal rental income! Speak with one of our Licensed Mortgage Bankers for more information.
Below are some examples of how Second Home Purchase Transactions differ from the purchase of a Primary Residence.
-
FHA & VA loan programs are ineligible for the purchase of a Second Home.
-
The minimum down payment for the purchase of a Second Home with a conventional loan is 10%.
-
Debt-To-Income ratios for second homes are slightly more restrictive.
-
The cost of mortgage insurance if you will have less than a 20% down payment is higher.
-
Lenders may require additional post-closing reserves.
Foundation Mortgage offers some of the most flexible second home guidelines in the industry. Contact one of our Licensed Mortgage Bankers for a personal review of your scenario and a better understanding of the nuances of financing your purchase of a second home.
Am I Ready to Buy A Second Home?
Buying a second home is a significant financial decision not to be taken lightly. How do you know if your finances are ready to support a second home? Below are some considerations to take into account when deciding whether the time is right for you to buy a second home.
Take a look at your current financial picture. Get a feel for how comfortably you are able carry your existing debt load and support your primary housing payment. Are you able to make these payments and still have money remaining to direct to your savings each month? If you are struggling to meet your existing obligations, it might not be the best time to add an additional housing payment.
If you are able to comfortably meet your current obligations, ask your Realtor and Mortgage Banker to put together some scenarios for you so you can evaluate how much money you will need for the transaction (both to purchase your second home and to qualify for the loan) and whether you will retain enough liquidity after closing to support both properties.
Second homes & home ownership in general can have it’s unexpected costs and expenses. It’s not always as simple as determining your monthly payment, taxes, insurance and HOA dues. Repairs, assessments, and other things go wrong from time to time. Adding an additional property to manage doubles the likelihood of unforeseen expenses to come up. Make sure you're in a stable position where you are able to absorb the unexpected should it arise.
Work with your Mortgage Banker to get a feel for what your new monthly payment will look like. Make sure you include the property taxes, insurance costs, Homeowner Association (HOA) dues and any other items unique to where you are purchasing. Usually consumers purchase second homes in areas they have less or little familiarity with. It is very important that you find a local realtor and work with your Mortgage Banker to get a realistic idea of what the local taxes, insurance, HOA dues, etc. will cost.
They may be quite a bit different from what you pay for your primary residence. Vacation Homes are often purchased on coastal areas, which may add flood insurance or increase your typical insurance policy or association dues. Do your research up front to make sure that once you add in all the costs, you are certain you can afford adding the additional payment for your second home to your existing debt obligations.
As mentioned in the previous step, a lack of familiarity with an area can lead to lots of problems when purchasing a second home. It is a good idea to enlist local professionals on your team: Realtor, Attorney, & Mortgage Banker whom are able to properly advise you on:
-
Market trends, comparables, closed/pending sales and listings.
-
Seller vs. Buyer paid items typically paid in the county/state.
-
Accurate estimation of taxes, insurances, HOA dues, mortgage rates & fees.
-
Unique qualification rules & an pitfalls/considerations for loan approval.
-
Typical local and state specific closing costs.
-
Estimation of your cash-to-close and total monthly payment.
