A second home/vacation home: the ability to have a place you can escape to for relaxation from work and a place to make memories with family and friends. How do you know you are ready financially? You want to be sure you are not being too risky financially by investing in a second home—whether that home is here at the beach, on a lake or near a ski-resort.
In order to qualify for a second home purchase, you need to show that you are a good bet as far as getting a mortgage on a property is concerned, because statistically people would default on a second home mortgage before they would on a primary home. Two of the most important factors for lenders when reviewing your file are: debt-to-income ratio and credit score.
Debt-to-income ratios are calculated by dividing your total debt per month by your gross monthly income. They take into account all expenses, such as existing mortgage, the new mortgage, car payments, credit card payments, etc. The rule of thumb for a second home purchase is 43% debt-to-income ratio, but there are approvals available up to 48-49%. It depends on credit score, loan to value ratio of the loan and the client’s reserves.
It’s also tough to pinpoint an exact credit score that will get a second home deal done. Scores in the higher 600s may qualify, but in order to get the best interest rate offers, most lenders want to see credit scores above 700, and the best rates go to those buyers above 740. As far as a down payment on a second home purchase, most buyers choose to put 20-25% down to allow for the best loan product and rate.
There are guidelines in place from Fannie Mae on second home loans such as: must be occupied by the borrower for some portion of the year, restricted to one-unit dwellings, must be suitable for year-round occupancy, and cannot be a timeshare arrangement.
Separate from Fannie Mae’s guidelines, most lenders want to see a second home a “reasonable” distance from your primary, and that number is generally considered to be 50 miles. If any of the requirements are not adequate in your case, the next option is to apply for an investment property loan, which requires the highest down payment and carries a higher interest rate.
In addition to the financial side of the coin, also give good thought to whether you are ready for the upkeep of a second home, the additional payment, and being tied to one location for your vacations.
Lauren Bunting is a Broker with Keller Williams Realty of Delmarva in Ocean City, Maryland.
