Everything You Must Know About Financing a Second Home

 

If you have equity in your home or saved a down payment and are ready to buy a second home, the good news is there are plenty of options for financing a second home. The key is understanding what’s expected of you to qualify and how to make the most of your ability to purchase a second home.

Getting Pre-Approved for a Second Home

Lenders take a more significant risk when financing a second home because you have less to lose if you don’t make your payments.

When you finance a primary residence, you will lose the place you and your family live, so you are more likely to ensure you make your payments. On the other hand, if you have financial challenges and own a second home, it’s easier to let it go because you still have a place to live, your primary residence.

So to get pre-approved for a second home, you may need the following:

• Large down payment – If you bought your primary residence with a low or no down payment, you won’t find that option with second home financing. Instead, you’ll need 10% or more down on the second home. Fortunately, you can get the money from your current home’s equity or your savings.
• Low debt-to-income ratio – Your DTI is vital in determining if you can afford a second home’s mortgage. Lenders look at your current DTI with your primary residence mortgage and other obligations and then add the second mortgage payment to see how it fits. Ideally, you’re DTI shouldn’t be under 45% to qualify.
• High credit score – Again, unlike when you bought your primary residence, you’ll need a higher credit score.

What to Consider When Buying a Second Home

If you’re considering buying a second home, here are some key factors.

Higher Interest Rates

Because buying a second home is riskier for lenders, lenders charge higher interest rates on second-home mortgages to compensate for the risk they pose. Each lender charges different rates, so its important to shop around for a competitive loan. Like when you bought your primary residence, the higher your credit score and down payment, and the lower your DTI, the lower the interest rate you’ll get.

Cost of Owning the Home

Just like your primary residence, you’re responsible for the real estate taxes, homeowner’s insurance, and HOA dues on your home. Include them in your budget to ensure the mortgage is affordable.

You may have to include the costs in an escrow account, which means they become a required part of your mortgage payment. If not, you must pay them when due yourself, and should include them in your monthly payment.

Maintenance and Repairs

Like your primary residence, you’re responsible for maintenance and repairs on your second home. Saving for things like a new roof, a broken HVAC system, and other emergencies is crucial. Budget 1% of the home’s value annually for common maintenance and repairs and have an emergency fund for other expenses.

Uses for a Second Home

If you don’t have a vision for a second home yet, here are some common reasons people invest in them.

Vacation Home

Having a second home near the beach or located in another city or state can give you and your family somewhere to vacation without making hotel reservations. It’s a great way to have a place for large families to gather or to give your family a comfortable place to stay in an area you love to spend time.

Second Home

You might consider owning two homes if you need a second home because of work or family. This is common for people who work in multiple cities or who have family that lives far away, and they want to spend quality time with them often.

How to Buy a Second Home

So what are the steps to buying a second home?

They don’t differ much from when you bought your first home, except for the stricter underwriting guidelines.

Here are the simple steps.

1. Get pre-approved

Consider getting pre-approved first to know what you can afford and what the loan will cost. This is a great time to compare your options and decide how to proceed when buying a second home.

2. Find a home

You can work with a real estate agent or shop for a second home yourself. Your pre-approval letter will show lenders you can afford the house and have taken the primary steps to finance.

3. Close on your home

After signing a purchase contract, you’ll submit it to the lender, who will complete the underwriting of your loan file. This means they’ll finish underwriting your qualifications and determine if the property meets the requirements. During this time, provide the lender with all necessary documentation to clear any outstanding conditions to help you get to the closing table.

Final Thoughts

Financing a second home is trickier than a primary home, but it’s not impossible. There are many loan programs and options to help you finance a second home. The key is to be honest with your loan officer to get matched with the right program and close your mortgage on time.

At Innovative Mortgage Brokers, we can help you make the process of financing a second home faster, easier, and cheaper. If you’re looking to purchase a second home in Pennsylvania or Florida, we are well-equipped to guide you through every step of the process.

With our experience, we can provide customers with all the information and guidance needed to secure an extremely competitive loan product for their financial situation. We are dedicated to finding the most competitive rates on mortgages so that customers can get a great deal.

At Innovative Mortgage Brokers we understand that financing a second home is different from buying a first home. We will work hard to find custom solutions for each customer and guide them through every step of the process. From researching suitable loan options to helping you complete all paperwork; we are there every step of the way.

We specialize in helping customers finance their second homes by working with them one-on-one throughout the entire process. We have relationships with lending institutions across the country, which allows us to find great competitive offers for your home-buying needs. If you’re looking to purchase a second home in Pennsylvania or Florida, we can help.