With home prices still low in many areas, and mortgage rates near historic lows, second homes as well as vacation properties have become very attractive propositions. Add to that the fact that in many areas inventory is currently high on these types of properties, and you have a prime purchase opportunity.
In starting your search, we can discuss how much you have to put down and what programs are available to you for a second home or vacation home. Typically, you will be required to put down 20 percent, but be aware that only Fannie Mae and Freddie Mac offer these programs; the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) do not.
As a result, Fannie and Freddie guidelines apply. This means you will likely be required to have higher credit scores to qualify (especially as you will likely be carrying two mortgages).
Financing a Second Home
Financing a second home is similar to financing a primary residence, as opposed to an investment property. Unlike an investor who can use rental income to qualify for financing, the second-home buyer must be able to carry both mortgages using their income alone, without the benefit of any supplemental income.
Although borrowers qualify using their own income, lenders still view these types of properties as risky. If incomes fall, or disappear altogether, it may become a choice between giving up the primary residence or the second home. In most cases, it will be the second home that will fall by the wayside.
That said, the 20 percent down payment will ensure the lender has some commitment from the buyer, who hopefully will want to make this purchase work.
From an underwriting perspective, second/vacation homes are defined as those properties that fall outside a reasonable commuting distance from the primary residence.
Lenders are leery of home buyers looking to purchase homes near their primary residences, especially homes that are significantly smaller than their main property. The reason: To a lender this has “investment property” written all over it.
Chances are you can still make the argument to an underwriter that you are purchasing a condo close to your workplace because you work long hours and want to stay there during the week and commute home on weekends, even though the second residence is relatively close to the first. Presented this way, the argument may hold water.
Vacation homes fall into a similar category in that few people are going to commute three hours each way to work, but will travel to their vacation property that distance away for long weekends and summer breaks. As long as it makes sense, it most likely will fly.