Buying Second Home Mortgage Lending Guidelines

In this blog, we will cover and discuss buying second home mortgage lending guidelines. As winter comes to an end and June is not so far in the future, people start thinking of a possible 2nd home. In today’s market, the 2nd home in a well-traveled location could begin to pay for itself if marketed and managed well. It could be a viable option to have a vacation home and an income stream during the seasons the property is not in use by the homeowner.

The Popularity of Buying Second Home During Booming Housing Market

With the success of Air B&B and other companies with similar ideas, listing 2nd home on a short term rental site allows the ability to pay the property off even sooner. Of course, as with any venture, there are risks in allowing strangers to come into vacation homes while owners are away. There are deposits and security measures put into place to protect homeowners interests.

When considering the 2nd home the lending options are different than those available on a primary residence. Not all loans are available on 2nd homes. FHA loans are for primary residences only. Loans offered for a 2nd home have a greater down payment requirement with at least 10% down is required under both Fannie Mae and Freddie Mac Guidelines.

Costs Of Buying Second Home

There are various finance options when it comes to buying a second home. Often people may choose to pay cash for their getaway home. Some get a cash-out refinance on their primary home in buying a second home. Or take home equity out on their primary residence to use as the down payment.

Buying Second Home Is Considered a Great Investment During Period of Inflation and Economic Unrest

With home prices steadily on the rise and rates remaining lower it is a good time to consider what owning a vacation home may be like. While the initial expenses may be great, if the home is used as a primary vacation spot it will save the individual and their family over time from expensive vacations, hotels, and travel expenses. In the end, there will be an investment that is able to increase in value over time and potentially earn income.

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Benefits of Buying Second Home

Buying second home through a mortgage can have several potential benefits. Still, it’s essential to consider your financial situation and goals before making such a decision. Here are some potential benefits of buying second home with a mortgage:

1. Rental Income: You have the opportunity to earn rental income by leasing your second home, which can help defray the expenses associated with your mortgage, property tax, and other costs associated with owning the property.
2. Vacation Property: Owning a second home can provide you with a vacation property where you can spend your holidays or weekends without the need to book accommodations. It offers convenience and familiarity.
3. Potential for Appreciation: Like your primary residence, a second home can appreciate over time. If the property’s value increases, you may benefit from potential capital gains when you sell it.
4. Tax Benefits: In accordance with your geographical location and prevailing tax regulations, you may be eligible for certain tax benefit, such as deductions for mortgage interest and property taxes on your second home. Consult with a tax professional to understand the specific advantages available to you.
5. Diversification: Owning a second property can diversify your investment portfolio beyond stocks and bonds. Real estate can hedge against inflation and offer long-term financial stability.
6. Future Retirement Home: You can use the second home as a retirement destination, allowing you to move into it when you retire, or as a place to spend part of your retirement.
7. Family Retreat: A second home can be a place for family gatherings and bonding, creating lasting memories for future generations.
8. Potential for Short-Term Rentals: If your second home is located in a desirable vacation destination, you may have the option to rent it out on platforms like Airbnb, increasing your income potential.
9. Asset Diversification: Owning a second home diversifies your assets, which can help spread risk in your financial portfolio.

Location Considerations When Buying Second Home

Prices vary when buying a second home depending on location. Whether or not a person is in love with the beach and the sand and a place like the Outer Banks of North Carolina, or imagines a cabin on the Blue Ridge Parkway in Virginia, there are still deals to be had. If considering a 2nd home with income potential one should research the following:

• events
• sites
• tourism guide
• travel guides for the area they are interested in potentially investing in.

If for instance one can find a spot that is well-traveled and listing the property on Air B&B is an option, there will be a much greater chance of filling up the rental dates on the calendar. The property’s likelihood to increase in value is greater and the income potential is increased.

Unique Locations

There are secret havens everywhere. I recently discovered an oasis in South West Virginia where right smack in the middle of nowhere there is a little bit of everything to keep the average family entertained. Step back in time and imagine a town named after the barber from Mayberry. Floyd Virginia is a culturally diverse small town with one stoplight, a brewery, and a distillery. The Country Store with live Bluegrass and river dancing, eclectic eateries, and arts, crafts and gallery haven. Home to 8 famous potters, many musicians, 2 wineries and the famous Floyd Fest which attracts thousands each July, this tiny town is truly “geographically desirable”!. So with thoughts of camping, the smell of salt in the air, travel and the desire to get away, March is the perfect time to begin investigating just where the second nest might be.

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Finance Option When Buying Second Home

Second home buyers cannot purchase second homes with government loans.

Government Loans are the following:

• FHA Loans
• VA Home Loans
• USDA Loans

Buying Second Home With Conventional and Non-QM Loans 

Government loans are for owner occupant properties only. To qualify for Conventional Loans, both Fannie Mae and Freddie Mac require the following:

• Meet  Conforming Mortgage Guidelines under Fannie Mae and/or Freddie Mac
• Minimum 10% down payment is required for second home financing
• The minimum credit score required is 620
• Maximum debt to income ratios is 50%
• Borrowers with strong credit profiles can 20% down, debt to income ratios can be capped at 50%
• Private Mortgage Insurance (PMI) is required on all conventional mortgages with higher than 80% Loan To Value
• Condotel Financing requires a 25% down payment and are 30-year adjustable-rate mortgages
• Non-Warrantable Condos require a 20% down payment and are 30-year adjustable-rate mortgages

Bank Statement Mortgage Loans for self-employed borrowers does not require any tax returns.

Creative Financing When Buying Second Home

Second Home Buyers who have no mortgage on their primary residence or equity can consider doing a cash-out refinance a mortgage and buying a second home with the proceeds. Here is the maximum loan to value caps on primary homes on cash-out refinance mortgages:

• FHA allows up to 80% Loan To Value
• VA allows up to 100% Loan To Value
• Fannie Mae and Freddie Mac allow up to 80 LTV on cash-out refinance conventional mortgages
• USDA Rural Development does not allow cash-out refinance mortgages
• Non-QM loans allow 80% down payment on second home loans

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NON-QM Loans For Second Homes

Gustan Cho Associates has non-QM loans for buying second home financing. There is no waiting period after bankruptcy and/or housing event with non-qm loans. There are no mortgage insurance requirements. There is no loan limit cap. We offer bank statement loans for self-employed borrowers with no income tax returns required. Contact Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.