Second Home Financing Guidelines on Home Purchases
This Article Covers Second Home Financing Guidelines on Home Purchases
Homebuyers of second homes can qualify with conventional loans. A 10% down payment is required. Rates on second homes are similar to owner-occupant homes. Rates on investment properties are significantly higher than owner-occupant and second homes. This is why homebuyers of second homes want to make sure it is classified as a second versus investment home. Homebuyers of second homes cannot qualify with government loans. FHA, VA, USDA loans are only for owner-occupant primary homes. Second home buyers can qualify for second home loans with conventional and non-QM loans.
Topics Covered in this Article
In this article, we will cover the following points on second home financing:
- Type of loans for second home financing
- Difference between second and investment home financing
- Can I use potential rental income to qualify for second and investment home financing?
Financing a Second Home
For those seeking a second home, there are minimum mortgage guidelines. Buyers cannot qualify for second home loans with government loans:
Mortgages on second homes needs to be conventional loans. FHA, VA, USDA loans are for primary owner-occupied homes only. There are requirements for a second home purchase to be classified as a second home. The deal needs to make sense.
If primary residence and second home are comparable properties in size and it is close to each other, then the second home purchase cannot qualify for second home financing. Needs to qualify as investment home financing. Lenders do not want to finance a second home buyer for a second home financing if the property is not a second home but an investment home.
There are differences between second home and investment home financing.
Differences Between Second Home And Investment Home Mortgages
The second home mortgage requires a 10% down payment. Mortgage rates are comparable to first home mortgage rates.
Investment home financing requires a minimum of 15% down payment. But most lenders will require a 20% down payment. Mortgage rates for investment home financing are higher than second home financing. Normally, investment home financing has 0.50% higher mortgage rates than second home financing. To qualify for second home financing, the second home needs to be quite a distance away from the home buyer’s primary residence.
As mentioned earlier, borrowers cannot qualify for second home financing if the second property is less than 60 miles from the primary residence.
Meeting Debt To Income Ratios On Second Home Mortgages
Second home buyers cannot use potential rental income with second home loans.
Case Scenario Where Second Home Loan Needs To Convert To Investment Home Mortgage. If a second home buyer has a high debt to income ratio and cannot qualify for a second home mortgage and the property is an actual second home there is an alternative. The buyer might have to do an investment home financing so the second home buyer can use the potential rental income as qualified income.
Buyers can use 75% of the potential investment home rental income to qualify towards debt to income ratios on investment home purchases. For example, if the home that is being purchased has a market rent of $1,000 per month, borrowers can use 75% of the $1,000 towards qualified income when calculating debt to income ratios on a mortgage application. By putting a 20% down payment and getting a mortgage loan as an investment home loan, home buyers can now add the rental income in calculating debt to income ratios.
This is a way where you can qualify for a second home with higher debt to income ratios where buying as a second home would not have qualified.
Condotel Financing And Non-Warrantable Condo Loans
Gustan Cho Associates Mortgage Group can help buyers of condotels and non-warrantable condo loans. Fannie Mae and Freddie Mac do not allow financing on non-warrantable condo units. Non-QM and alternative finance lenders will finance condotels and non-warrantable condo units.
Here are the requirements:
- 25% down payment on condotels and 20% down payment on non-warrantable condo loans.
- The condo unit needs to be at least 500 square feet.
- Minimum 680 credit scores.
- 43% debt to income ratios.
- One year reserves for all properties borrower has in their financials.
- Reserves can be in other liquid assets such as 401k, securities accounts, other accounts.
- 30-year term but adjustable-rate mortgages only.
A warrantable condo complex can become non-warrantable. This can happen if more than 51% of the owners are renting their condo units. Warrantable condos mean over 51% of the condo owners are owner-occupant primary residents.
Qualifying For Mortgage With A Lender Licensed In Multiple States With No Lender Overlays
Home Buyers looking to qualify with a national direct lender with no mortgage overlays on government and conventional loans can contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] We are second home mortgage experts and have zero overlays on government and conventional loans. We also offer portfolio loans on condotel financing and non-warrantable condo loans. Gustan Cho Associates also are correspondent lenders on non-QM loans and bank statement loans for self-employed borrowers.