Buying a second home may be a very smart choice. Not only do you get the opportunity to go on a holiday and get away without having to deal with other tourists in hotels or the annoying cleaning fees for apartments or Airbnb, but also you could make a huge profit out of it if you decide to make it into a holiday home for others to enjoy as well.
Buying a second property with a second mortgage loan has some implications, however. Banks are more likely to give lower interest and lower mortgage rates to people who are buying their primary residence, as they’re obviously more likely to make the repayments to keep a roof over their heads. For this reason, there are many things to consider when asking for a second mortgage, from tougher underwriting requirements to a larger down payment. Read on to find out more about the implications and outcomes.
1. Be Ready To Define How You Will Use Your Second Home From The Get-Go
Assuming your second home won’t become your primary residence, you need to let your lenders know what you will be using your second home for from the get-go. This is important because different rules and mortgage rates apply to different mortgages depending on the properties’ intended use. For example, if you intend for the property to be solely used as a second home, it must be a specific distance from your primary residence, and you must spend a certain amount of time of the year in it to qualify.
If you intend to use the property as an investment property, you may face higher down payments and higher interest rates. Lenders consider investment properties to be higher risk since the buyer may be more prone to ignore issues in the home, or they may be more likely to skip a payment if they get into financial trouble.
If you are planning on renting the property, the lender may ask for a rent schedule and other details. Similarly, if it’s intended to be a second home, you’ll be asked to demonstrate other requirements.
2. Underwriting Will Be Tougher
Since you already have a primary residence with a mortgage loan, underwriting will feel a lot different than when you obtained your first home as mortgage rates will change. Some things that change are the credit score requirements, which will usually be higher than the requirement for a first home. The debt-to-income ratio will remain 43% but be mindful that with a mortgage on your shoulders already, this requirement may be tougher to meet!
A down payment for a primary residence’s first home mortgage may be as low as 3%, but for a second mortgage for a second home, it can increase to as much as 20%. Remember that you may be able to meet this requirement by borrowing equity from your primary home and avoiding those pesky insurance costs.
3. All About The Reserves
When looking to get a second mortgage, lenders will have a series of requirements that include reserves. Reserves are assets that you possess in order to pay your mortgage in case you suffer from an income disruption. This means one month’s reserves would be equal to the amount of money required to take a month’s mortgage loan payment.
To buy a second home you’ll need at least two months’ reserves, and this is if you qualify as a well-qualified wage earner. In case you’re self-employed, or you have other difficulties in life that could affect your income, this figure may rise to 6 months. Of course, these requirements are not as rigid as they seem, and you may be able to negotiate a smaller down payment or a lower credit score if you have enough monthly reserves to convince your lender you’ll be reliable when paying back your second mortgage loan.
4. Consider The Added Costs
Unfortunately, asking for a second home mortgage does come with added costs you should carefully consider. Getting home insurance may be more expensive, especially if you’re intending for your second home to be a holiday residence. Depending on where it is located you may be able to use your primary home’s insurance to cover some of your second homes’, but that will depend on how much time you spend there and a plethora of other factors such as the wildlife in the area or things like flood zones.
Furnishings and maintenance may be things you haven’t thought about in the same context as your second mortgage, but you definitely should! Your new home may need new furnishings that obviously don’t come with the home itself, and there may be added maintenance costs. On top of this, utilities and taxes will add up too, so it’s important to calculate how much this will all add up to, even if your monthly mortgage repayment rate seems low. You don’t want to be caught in a sticky financial situation!
5. Do Your Research Thoroughly And Get Advice
A second home can be a very solid, and at times, profitable investment, but it can also quickly turn into a financial disaster if the decision is made in a rush and without the appropriate research. Depending on the reasons behind your decision to purchase a second home, you may want to ask yourself certain questions, for example, is it better to buy a holiday home or stick to home rentals for vacation? If remote working is an option, do you really need a second home for business purposes? Or is your income going to be enough to support two home mortgages for the next fifteen or twenty years at least?
Getting financial advice from experts is the best way to assess all these questions, create a suitable budget and prepare the purchase for your second dream home!
All in all, a home mortgage is a huge step in life, and so is a second one. If you believe purchasing a second home is the best choice for you, be sure to follow this advice and take all the necessary precautions so you can enjoy your second property stress-free!