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Understanding Mortgages

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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.

Second homes and investment properties
with Residential Mortgage Services

 


Helpful Tips

Fire fighters battling a blaze

Fire Safety Preparedness in your Home

A fire can become life threatening in just two minutes and will quickly produce black smoke making it extremely hard for you to see. That is why it is important for you and your family to not only take steps to prevent fires, but have a plan together in the worst should happen. Educating and preparing yourself can be a life saver.

  • Make sure that smoke alarms are on every level of your home and test them monthly.
  • Create a home fire escape plan for you and your family and practice it twice a year.
    • Every family member should know two ways to escape from each room in your house.
    • Inhaling smoke is very dangerous, so make sure you stay low as you escape from your house.
    • Practice feeling your way out of the house with your eyes closed.
    • Make sure you have a designate meeting area outside in the case of a fire.
    • Get out and stay out! Never go back in for people, pets, or things.
    • Make sure to time your fire drill and keep it under two minutes to escape.

There are precautions you can take to help decrease the risk of a house fire:

  • Don’t overload your electrical circuits.
  • Unplug hair dryers and other small bathroom appliances when they are not in use.
  • Do not run extension cords under rugs and carpets.
  • Replace frayed electric cords.
  • Stay in the kitchen anytime you are frying, grilling or broiling food.
  • Keep baking soda on hand for extinguishing kitchen fires.
  • Have portable fire extinguishers that are easy to access.

Get your family together and have a conversation about how to prevent fires and implement a plan in case there is a house fire in your home, it could save your lives.


Mortgage Speak

What does LTV stand for?

Jul 12
5:00
PM
Category | Mortgage Speak

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What does LTV stand for?

You'll encounter many acronyms when you start speaking with mortgage and real estate professionals and it's easy to feel overwhelmed. Have no fear, we're here for you!

LTV stands for the Loan-to-Value ratio. What does that mean? LTV describes the loan amount as a percentage of the purchase price or value of the property.

Example time:

You're looking at a house that's perfect for you in every way. It's listed for $250,000. You've been saving up for this purchase and you have money set aside for a down payment and closing costs, plus hopefully a few extras. Working with your favorite loan officer, you're trying to figure out how much to put into the transaction so your monthly payment will be in that manageable sweet spot and you'll have a little left over to cover moving costs, furniture purchases and any unforseen needs. Closing costs (the amount of money you'll need to pay to cover the transaction, like transfer taxes and that kind of thing) can be estimated. The big question is, how much should the down payment be? You look at a few scenarios.

If you put 5% toward the home purchase, you'll be borrowing 95% of $250,000, which is $237,500. Said in another way, the loan ($237,500) to value ($250,000) would be 95%. Try saying that five times fast. Then you'll appreciate how easy it is to say, "95% LTV."

Wanted to look at a 20% down payment? That would be simplified to "80% LTV."

It's basically a quick way to say how much money is being borrowed without getting into specific dollar amounts. It works on refinances, too. Want to refinance your home so you're no longer paying monthly mortgage insurance? You might start talking to that favorite loan officer about mortgage loan programs at or under 80% LTV, since that's often the mark where mortgage insurance is no longer required.

See? It rolls off the tongue after you get used to it. Go ahead and try it out the next time you speak with your real estate agent or loan officer. It's an easy way to discuss your home financing options before getting too deep into exact dollar amounts, and it might just impress your friends.


Things to Consider

3 houses on growing stacks of coins

Should you invest in real estate?

Financial experts don't agree on everything, but one thing they share common ground on is the reliability of real estate as an investment.

Since 2012, home prices have risen with each passing month, according to the National Association of Realtors. Within days of hitting the market, for-sale properties across the country are snatched up in short order, as demand continues to far outpace supply. Depending on your available resources and financial goals, investment properties can help supplement your income or become a full-time occupation.

If real estate is something that you've always found interesting, you may be wondering where you begin. In other words, how do you start investing in real estate or go about buying your first investment property. You may also be curious about what you should know before you fully enter the real estate market and the extent to which you'd like to be involved. This should help you answer some of these questions.

What do real estate investors do?

As their title implies, residential real estate investors use financial resources in order to build, optimize, maintain or otherwise manage property that people use for dwelling purposes. Everyone needs a place to put their things and kick back from life’s daily stresses, and polls show buying a home is something the vast majority of Americans hope to do. The ongoing desirability of homeownership has led more people to start investing in various types of real estate. Fun fact: According to NAR data, 23 percent of the home sales in February 2019, the most recent month for which data is available, were cash sales.

Just how involved real estate investors become in the process is for them to decide. For example, those who wish to supplement their income, may opt to buy shares in a real estate investment trust, or REIT.

Similar to mutual funds, REITs function as organizations that maintain various types of real estate, whether it be commercial (like offices in high rise buildings, residential (townhomes, single-family units) or those used for accommodation purposes (like hotels). REITs can be a good starting point for buying real estate because there's usually less responsibility involved, particularly if the REIT is a public one.

A much more involved form of real estate investing is buying houses to resell them, typically after implementing necessary renovations. Better known as house flipping, this can be a potentially lucrative way to turn a profit and is something that an increasing number of properties have been the product of. For example, in 2018, more than 207,950 single-family homes and condominiums were flipped, according to ATTOM Data Solutions. They accounted for roughly 5 percent of all real estate transaction over the 12-month period.

Getting a higher price on a flipped home is made possible by renovating properties, which can increase their resale value. However, it’s important to do your homework before investing in a fixer-upper so you know how much it will cost to make the necessary improvements. Whether you do the repairs yourself or hire someone to do them, you want to avoid spending more on the renovations than the potential increase in appraised value. 

The labor-intensive elements of home flipping - both in research and physical work - is part of the reason why experts recommend it only for those who have the amount of time and available resources to make the commitment.

Is it a good time to invest in real estate?

Former Speaker of the House of Representatives Tip O'Neill used to say that all politics is local. In other words, goings-on in terms of activities, events or circumstances are subject to change, depending on the place you're talking about. The same can be said for real estate. Asking prices, home buying interest and inventory in one portion of the country might be different from the next.

Generally speaking, though, few can deny that it's a great time to be buying real estate, if for no other reason than climbing home values and the pace at which people enter the marketplace. Indeed, in February, existing-home sales rose 12 percent from the previous month, based on the latest NAR data. Additionally, the median price among all housing types - single-family, townhome and condo - rose 3.6 percent on a year-over-year basis to $249,500. February 2019 was the 84th month in a row that home values rose from the same period a year earlier.

What's more, in a separate NAR study, more than 50 percent of those surveyed said they considered the current real estate market to be worthy of entering in order to buy a home. This was due, in part, to a strong economy, 53 percent of whom thought it was continuing to improve through
the first three months of 2019.

But just because there's ongoing consumer interest in buying homes doesn't necessarily mean it's a no-brainer investment. Here are a few key considerations before you make the decision:

Do your homework

Whether you buy property as an investment vehicle is a determination you should only make after doing your research. There are lots of online resources you can go to that provide tips on cost-benefit analysis, but things you can do on your own time include actually visiting the property that's up for sale, what other homes in the area sell for and your financial capabilities.

You may want to meet with a financial advisor or mortgage provider who can go over some of the numbers with you to give you an idea of whether or not you're a good candidate and have the necessary cash flow or ability to make a down payment on an investor mortgage (usually 20 percent of the purchase price).

Start out small

At the outset, avoid buying a house that will require a lot of renovation if you plan on rehabbing it yourself. Starting small will allow you to get your feet wet and determine if investment property work is something you wish to pursue long-term.

Pay off debt

Debt is always something you should try to avoid, but if you require an investment loan, you may be required to be free of any outstanding debt, such as medical bills or unpaid tuition bills. Prioritizing your finances and credit score can improve your odds of mortgage approval.

Real estate is a road worth traveling that's paved with endless possibilities. Through planning, research and smart money management, it just may be the super highway to a future of wealth and prosperity.


Helpful Tips

Fireworks in red, white and blue

Use caution handling fireworks this Independence Day!

According to the National Fire Protection Association, fireworks start an average of 18,500 fires per year and cause an average of $43 million in property damages. Make sure your Fourth of July is both fun and safe with these firework safety tips!

  • Homemade fireworks are illegal, so never try to make your own.
  • Sparklers are not safe for small children to use, they burn very hot (hot enough to melt some types of metals) and can set clothes on fire.
  • Make sure fireworks are ignited in a clearing without nearby structures, power lines, homes, bushes and dry leaves.
  • Have a bucket of water and a hose nearby when setting off fireworks in case there is an accident.
  • Pets should be kept securely indoors to keep them from running away or getting injured if the loud noises spook them.
  • Always wear eye protection when lighting fireworks.
  • Never shoot fireworks off from inside a container.
  • Never hold fireworks in your hand when lighting them.
  • Never put any part of your body over fireworks when you ignite them.
  • Do not try to relight a firework.
  • Do not carry fireworks in pockets.
  • Soak all fireworks before throwing them away.
  • Remember, fireworks are not legal everywhere. Check your local ordinances first.

Be safe and smart this Fourth of July and Enjoy your holiday!


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