One irony of the real estate market seems to be that the more inventory that’s available, the harder it can be to actually get a piece of it. Buying additional homes may make sense for many, but obtaining a second home mortgage is not guaranteed, even if a buyer has already established himself with a primary home.
Buyers who haven’t purchased a home, whether primary or secondary, need to understand newly enacted mortgage guidelines.Lenders now consider overall income, credit rating, assets and how much cash flow will be left after closing. Lenders also consider a buyer’s banking history and continuous employment record. Lenders may require a higher down payment and liquidity amount for second homes because the risk is higher for buyers defaulting on a second home mortgage. Rates and origination points are normally similar to owner occupied rates.
The existing home’s value and equity play a large factor with lenders for second home loans since the existing home is collateral. Less than excellent credit the lender may not approve an amount larger than the equity of the first home. In addition, the IRS imposes less favorable tax deduction rates on second mortgages.
Home Equity Loans
Lenders like buyers who have established themselves with a primary residence may suggest taking out a home equity loan to finance a second home. However, home equity lines often have variable rates, so buyers could end up at a disadvantage. A second mortgage, as opposed to an equity line, may also be a wiser choice come tax time.
Even with a large down payment, home equity, and sufficient cash flow, it may be harder to obtain a second home for buyers with risky credit. In addition, interest rates on second mortgages run higher because if the mortgage defaults, the law requires the first mortgage to be paid off first, creating a higher risk for the lender.