Guide to Getting a Mortgage on a Second Home

I live in the land of ridiculously expensive homes, where many people, even if they have money, can't afford to buy a home because of how expensive things are and how difficult it is to get a mortgage here. But assuming you live in a place where homes aren't exactly a fortune, and you were thinking about, perhaps, buying a second home to rent out for income, there's stuff you need to know about that. Rules are different for second mortgages vs first ones. Here's more.

Are you planning to buy a second home? If yes, it might be that you need to take out a mortgage for it. You have to know that there’s a difference between a primary home mortgage and a second-home mortgage.

While some homebuyers have the cash to pay for their second house, others need financing for this significant purchase. One survey reveals that almost 50% of buyers of second homes pay cash up to 70% of the total price of the property.

For more information about getting a mortgage on a second house, here’s a guide that can help you.

Make Sure You Can Afford Buying a Second House

Buying your first house or second house is a big financial decision. After all, the house prices nowadays are not affordable. Thus, you must have the money to afford this significant purchase.

So, to know if you can afford a second house, you need to know the cost of the down payment, monthly payments for the mortgage, insurance, property taxes, utilities, maintenance, among other expenses.

Difference Between a Mortgage on a First Home and Second Home

Depending on factors, such as your credit score, you can put a 5% down payment on a primary mortgage. However, for a second property, you need to put at least a 10% down payment because lenders require a higher credit rating on homebuyers who are looking to buy a second home. Interest rates are also higher on a second mortgage compared to a primary mortgage.

When you compare the application process, there’s no difference when you apply for a primary mortgage and a second mortgage. But, it’s smart to always look out for convenience and affordability. In this case, you should gather information from multiple lenders to pick a house loan that’s best for you.

Second Home Mortgage Qualifications

Don’t forget to review your income, assets, and credit score before applying for a mortgage on your second home.

When buying a second property, it’s crucial to have extra savings to pay for your monthly mortgage payments if ever you have lost your job or any source of income. Applicants who are less qualified need to have 6-months' worth of savings, while well-qualified applicants need at least 2-months' worth of savings.

Your down payment and credit score will impact the debt-to-income requirements provided by the lender. The lender will allow a higher debt-to-income requirement if you have a high credit score and you put a bigger down payment.

Some mortgage providers are strict when it comes to renting out your second home to offset expenses. Lenders find it risky when a homebuyer does this strategy of using the house as an investment rather than a secondary residence of the homeowner. It’s advisable to read the mortgage terms whether you can rent out the property or not to avoid problems with your lender.

Typical mortgage terms for a second home or vacation home:

• The owner should live in the property for some part of the year.
• It must only belong to the buyer.
• It must be a one-unit house that the owner can use year-round.
• It should not be managed by a property management company, or be rented out.

Down Payment Options for a Second Home

When it’s time to make a down payment on your second house, there are two popular options that you can consider. You can open a Home Equity Line of Credit or HELOC on your present property or you can use a cash-out refinance.

• HELOC. If your primary house has enough equity, you can get a HELOC and use the money for the down payment on your second home. This option prevents you from refinancing your current mortgage. Getting a house valuation service will help with this.
  
  
• Cash-Out Refinance. This option allows you to pay off your current mortgage, and you’ll have a new mortgage with different terms compared to the first. The period of payment for the new loan may be shorter or longer than the original loan, and the monthly payments may be lower. Takeaway

Now you know how to get a mortgage on a second home. First, make sure that you calculate the total cost of the purchase to ascertain that you can afford it. Add to the calculation the property price, down payment, mortgage, insurance. Pick a lender that offers the best loan that suits your financial situation.