Second Home Financing: 2014 Update On Second Home Guidelines


Second Home Financing

By Gustan Cho

There are various reasons why homeowners want to purchase a second home.  Second home financing have different mortgage lending guidelines than an investment home financing.  Investment home financing require larger down payment, higher interest rates, and many investment home mortgage lenders will require 6 months of principal, interest, taxes, and insurance as reserves.  Investment home financing require 20% down payment whereas second home financing requires the second home buyer to only put down 10% down payment.  Second home financing mortgage rates are about 0.50% to 0.75% lower than investment property mortgage loans.  Second home and investment property mortgage loans are conventional loans only because FHA only allows owner occupant primary residences only so second home and investment property mortgage loan applicants need to meet conventional mortgage lending guidelines.  Home buyers of second homes must not just qualify personally but the second home needs to meet second home mortgage eligibility requirements.

Qualifying A Subject Property As A Second Home

Second home buyers need to make sure the potential purchase of the second home will qualify as a second home under the eyes of the mortgage lender.  A second home purchase cannot be too close to the home buyer’s primary residence and the purchase needs to qualify as a second home.  For example, if a second home buyer primary residence is in Tampa, Florida and the home buyer wants to purchase another property in Tampa, Florida, he or she will have a tough time convincing the mortgage lender that the second home purchase will be used as a second or vacation home and the chances are that they will not qualify for a second home mortgage loan due to the close proximity.  They can qualify for an investment property mortgage loan, however, as mentioned earlier, an investment property home mortgage loan requires a larger down payment of a minimum of 20% and the mortgage rates will probably 0.50% to 0.75% higher than a second home mortgage rate.  However, if the second home buyer is purchasing a waterfront property that is close to the primary residence or in a resort like Orlando nearby Disney World, then the deal will make sense as a second home.  Another example that would classify as a second home is if the second home buyer lives in Illinois and plans on purchasing a home in Florida.  This case scenario definitely makes sense and the second home buyer will have no problem qualifying for second home financing from any mortgage lender.

Eligibility Requirements For Second Home Or Vacation Home Financing

To qualify for second home financing, the home buyer needs a minimum of 10% down payment.  Both the primary housing payment and second home housing payment will be included in calculating debt to income ratios.  Maximum debt to income ratios are capped at 45%.  Rental income or potential rental income cannot be used to qualify as additional income.

Second Home Purchase Strategy

Many folks who plan on retiring to Florida or California intend on purchasing their home there to retire in and sell their existing home.  However, if they retire, they may not qualify for a mortgage due to no income or limited income.  Most retirees work part time on a cash paying job and get social security or pension.  For those who feel they will not qualify after they quit their jobs can see if they can purchase their retirement home as a second home while they are still working full time.  Once they qualify for a second home mortgage loan, they can purchase the second home, retire, sell their home, and move in to their second home and use it as a primary residence.  Before quitting your job or giving notice to your employer that you are retiring, please explore this option.

What If You Do Not Qualify For A Second Home Due To High Debt To Income Ratios

In the event you do not qualify for second home financing due to high debt to income ratios, you can purchase your second home as an investment home with 25% down payment.  By financing it as an investment home with 25% down payment, you can use 75% of the potential rental income towards debt to income ratio qualification even if you do not have any tenants or you do not intend in renting the home.  Although you have to come up with the larger down payment and get a higher mortgage rate due to being an investment home mortgage loan, this can be an option in the event you cannot qualify due to high debt to income ratios.

You Do Not Need A Primary Residence To Purchase A Second Home

If you are currently living with family and you do not own a home but want to purchase a vacation home or second home in a different area than where you work, you can do that.  Same down payment and debt to income ratio requirements apply: 10% down payment and no greater than a 45% debt to income ratio.

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