Buying a second home: A brief primer on a long-term investment
If you are considering purchasing a second home, you may be wondering how the process works and if it's something you can actually pursue, based on your finances, credit score, existing mortgage rates and other factors that help determine your eligibility. Regardless of the purpose for which you seek to purchase a second home, you may be wondering how the process works.
By the end of this article, you should have a better idea on whether buying a second home is a worthwhile consideration for you and your family.
Before getting into the specifics, it's helpful to get a better lay of the second-home land, in terms of how many are in the nation's inventory and where they actually exist. According to data released by the National Association of Home Builders in December 2018, second homes in the U.S. total 7.4 million. That figure, of course, can change even on a monthly basis, depending on the level of construction activity going on at any given time, but it at the very least gives you a ballpark estimate as to their numbers.
Perhaps unsurprisingly, a large share of vacation properties are located in Florida. Indeed, the Sunshine State is home to 1.1 million second homes, which amounts to 15% of the nation's overall total. An additional 35% are found in California, New York, Michigan, Arizona, Pennsylvania, Texas and North Carolina. And from a county perspective, Maricopa - located in the Grand Canyon State of Arizona - is home to over 113,500 second homes, more than any other single county, with Florida's Palm Beach and Broward Counties rounding out the top three.
How do you qualify to buy a second home?
Now that you know the hard data, you may be curious about qualification and if it's fundamentally different from the steps involved with buying a primary home. The truth is no two home loan processes are identical. Every buyer has unique circumstances, which is why lenders prefer to have as much financial data on a borrower as possible so they can get a clear picture.
That said, there are a few rules of thumb to better determine your eligibility. For the most part, lenders view mortgages on second homes as not necessarily risky but still higher-risk loans. That's because, as the name implies, these mortgages are often taken out in addition to ones that are already in effect. As a result, qualification standards tend to be more stringent. Your credit score is a classic example. A higher FICO® score suggests borrowers are keeping up with their payments, which may enable them to obtain a lower interest rate.
Your debt-to-income ratio is something else your lender will want to check. This measure assesses how much of your gross monthly earnings go toward paying ongoing expenses. It's pretty easy to figure out if you don't already know it. All you do is take the sum of how much you spend on monthly debt and divide it by how much you make in earnings over the same period before taxes. The lower the resulting percentage, the better. Generally speaking, lenders prefer to see a DTI of 41% or less, but even here, you may have some wiggle room, depending on the size of the loan you're requesting and some of your other financial particulars.
Is a down payment mandatory for a second home?
Most loan programs require that a certain percentage of the house's list price be paid up front. There are some exceptions to this, such as if you're a first-time homebuyer and serve in the military, as VA loans typically do not necessitate a down payment. When buying a second home, though, down payments are mandatory. Generally speaking, expect the down payment to be at least 10% of the purchase price, although some lenders may require it to be larger, the most common being 20%. The amount may depend, in part, on your credit score; the higher it is, the lower the down payment requirement.
For many people, buying real estate is the biggest financial decision they'll make in their lifetime. So it's especially important to go into the second-home purchase process with your eyes wide open.
What else do I need to know about buying a second home?
If you’re considering renting out your vacation home to tenants, there are income tax implications. It’s important to consult with a tax or financial advisor beforehand so you know what to expect.
It's a lot to think about, but we're here for you. Whether looking at a second home as a vacation property or a second residence for the sake of work, or another reason entirely, it's a good idea to start a conversation with your favorite mortgage loan officer.