Second Home Down Payment Requirements
The second home down payment requirement is usually stricter than your primary mortgage. You might need a second home as an investment or vacation. Either way, lenders charge a large down payment because lending money for a second business is usually risky business for lenders. In case you are not aware already, the down payment is part of the purchase price that you must pay upfront. The upfront costs must be paid since it’s not your primary residence, and there’s not much for you to lose, resulting in stricter requirements.
What is the Down payment for a second home?
Oftentimes, you must pay a large down payment for a second home due to the risks involved for the lender. It doesn’t matter if it’s an investment property, a part-time residence, or a vacation home, loan lenders prefer a large down payment. Moreover, if it’s a vacation home or a second home, there are also extra tax implications and expenses involved. Buying primary homes is much easier since there are several low-cost loan options available. The down payment can even be as low as 3.5%. However, in the case of a second home, the calculation for the down payment largely varies, depending on the lender and your credit profile. The down payment can even go up to 25%.
Minimum Down Payment for Second Home
The minimum down payment for a second home is usually larger, especially if it is not a government-backed loan or an all-cash purchase. The reason is that lenders prefer to be more directly involved financially and avoid the risk of default. In the United States, you cannot take a Federal Housing Administration (FHA) loan for a second home, which is why you need a portfolio loan or conventional financing from a private lender. The down payment can be anywhere between 10-25% and lenders do this to make the entire process less risky on their part. Note that in the case of investment properties, you might have to bear a higher cost for a down payment.
The down payment usually becomes less if you have an excellent credit score or a low debt ratio. However, if your credit score requirements aren’t that impressive or you have high debt, you might need to make a down payment of up to 25%.
What are the options for second home down payment?
Here are the options for second home down payments:
1. Cash-out refinance
Cash-out refinance is a type of loan that you can take out to refinance your mortgage loan. With this, you can cash out the equity that you have gained and refinance your mortgage with fresh mortgage terms such as a longer repayment term or lower interest rates. For instance, you have a current mortgage loan of $100,000. You can refinance it and take out a loan of $160,000 and use the rest of the amount (subtracting the closing costs) for a down payment. This type of financing lets you borrow up to 85% of the home’s value. You will get some instant cash and most importantly, lowered monthly mortgage payments.
A Home Equity Line of Credit (HELOC) is one of the financing options that allow you to borrow money against your existing equity. You can cover the down payment of your second home with the instant cash you get with HELOC. With this, you won’t have to refinance your current loan balance and can just take out a line of credit for the down payment. Think of it like a credit card: you can draw money and use it however you want and then make interest payments on the withdrawn amount. The mortgage rate can change monthly and you have to make principal as well as interest payments in order to repay the borrowed amount.
Second home mortgage requirements
A mortgage on a second largely differs from a mortgage on a first home and consequently, the second home mortgage requirements are also different. The borrower as well as the home being purchased should fulfill certain eligibility requirements in order to qualify for a mortgage application, according to Freddie Mac and Fannie Mae.
Second home mortgage borrower requirements
There are several second home mortgage borrower requirements that the borrower must follow. The first and foremost requirement is the down payment, which is non-negotiable. The minimum percentage is 10%, but it can vary, depending on different factors. Other than the large down payment, there are a few other things that the borrower must keep in mind. One is, of course, the credit score. The typical credit score for qualifying for a mortgage for a second home is 680 or higher. Higher the credit score, higher your chances of approval.
You can even buy a home with a credit score between 640 and 679, but then you have to make a larger down payment, which can be more than 25%. The minimum credit score is 640. Lastly, other than the credit eligibility guidelines, you must also keep in mind the maximum debt-to-income ratio (DTI) which is 45%. Keep in mind that if you are lacking in one of the factors, you can make up for it by strengthening one of the other factors. For instance, if you have the exact credit score minimum of 640, you still have a chance of getting approved if you make a larger down payment. Similarly, if your DTI is high, you can make up for it by having a high credit score. This kind of flexibility allows people to qualify for mortgage options for their second home even if they might not have the perfect credit score or DTI. You must also have a stable income. Lastly do not forget your share of the remaining property taxes in your monthly budget. These taxes can be combined with your monthly payments or installments throughout the year.
Second home mortgage property requirements
Other than the borrower, the property should also fulfill a couple of second home mortgage property requirements so that they can qualify for loan programs. The first of which and perhaps the most important is that the owner has to occupy the property part-time, that is, a portion of the year. Secondly, the property has to be one unit and can be used year-round. The buyer should only be the sole owner and nobody else. Moreover, the property cannot be given out for rent on a full-time basis. It cannot also be given out for timeshare arrangement, that is fractional ownership. A property management organization that might control the occupancy of the property cannot operate it.
Contact the Cain Mortgage Team today to get your mortgage on the right path.