Buying a Second Home and Financing Options

There are many reasons for people to consider buying a second home, with the most common being enjoyment, investment and retirement. These all sound great, and if you’re in a position to buy a second home soon we congratulate you. Our goal here is to provide some education on what is different when purchasing a second home versus a primary residence.

The first major difference is in the application process. Many lenders are willing to take on some level of risk when lending for a primary residence. When it comes to buying a second home, however, the level of risk that lenders are willing to accept is less. In turn, you’ll find second home financing rates run one-quarter to one-half point higher than those for first residences, and the approval process is much more difficult.

The most common mistake made when purchasing a second home, is to finance it with a home-equity line of credit on your primary residence. This is a mistake for several reasons. For starters, this type of credit-line generally floats a point or two over prime, so you end up repaying a much greater sum than you would have if you had mortgaged the full loan. If you decide later to convert this loan to a mortgage, you’ll find yourself without many of the tax advantages coming from owning a home. There is an IRS rule that allows only 90 days to secure a mortgage, and mortgages done later do not qualify for deductions.

When purchasing a second home, it generally makes sense to deal with only mortgages or cash purchases. Therefore, if you have plans to purchase a second home, but don’t have the financing yet, no matter how great the deal might appear on paper, you’ll want to take your time. Be sure to get your financing in order first, then if a large down payment is required, save for this or use a short term loan for this payment, while securing a mortgage for the maximum total amount you’re borrowing towards buying a second home.

Renting out a Home with a Mortgage

The process for securing a loan on a second home that will be used as a rental is often more difficult than it is for a vacation home. There is also additional expenses and paperwork involved. For starters, the lender is going to be looking for proof that the rental business will be profitable, and will generally require a cash flow statement for a property showing its rental history. Also, you will be required to get a second appraisal which shows rents and occupancy rates at similar homes.

After this long process, don’t count on the lender using rental income as a consideration. In fact, if proof of income is not a factor, you might want to avoid telling the lender that you are considering renting the property. This can save you headaches down the road and can make the already difficult second home mortgage application process a bit smoother.

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