Borrowing for a second home
Denver, CO – September 24, 2013 – (RealEstateRama) — Since the credit collapse of 2008, securing a mortgage – even for a first home – has become more difficult, even for extremely well qualified buyers. The most important thing to consider is whether or not your second home is an investment property or truly a “second home.”
A second home
The most common purpose of a second home is as a vacation property.
People often buy condos in the cities where they do business most often, too.
If you intend to occupy your property for part of the year, it’s considered a second home. If you’re going to rent your vacation home out, even for a short period of time, the banks will consider it an “investment property,” which means your mortgage will cost more. The second you begin to collect rent on your second property, banks consider it an investment property. If you want your second home to be considered a vacation property, it usually needs to be located in a resort area, say in the mountains or near the ocean.
An investment property
It’s exactly what it sounds like. When you buy an investment property, you’re not buying it for your use and enjoyment. You’re buying it for other people to use and enjoy. The reason you buy an investment property is to generate revenue, either by renting it out or to “flip” to another buyer. Banks assume you won’t be as “attached” to an investment property, and they perceive themselves as taking a greater risk on an “investment property” purchase rather than a “second home.” As such, a mortgage on an investment property costs a lot more.
What it takes
Although more and more people are paying cash for houses, especially wealthy foreign buyers, it’s still necessary for most people who want to own a second home to get a mortgage.
Mortgages on second homes
It’s still difficult to qualify for a conventional mortgage. That means it’s even more difficult to qualify for a mortgage on a second home or an investment property. Even then, it’s still easier to secure a mortage for a second home. All of the normal rules apply. You’ll need to put 20% down to limit the banks’ risk by adding equity from the word “go.” You’ll need to have sterling credit. And the income to justify the additional pressure on your monthly budget. You will have to prove to the bank you have the means to pay for your second home.
Mortgages on investment properties
When it comes to investment properties, you may have to put significantly more down and have additional income to prove to the bank that you can take care of problems as they crop up. This doesn’t apply if you invest in property with a company that specializes in it. Click here to find out how that work.
The reason you have to put more down is leverage. When you put 20% down, you’re levering up approximately 5:1, meaning the home can lose 20% of its value as soon as you buy it and the bank won’t lose any money in the event they have to foreclose. With an investment property, leverage ratios of 2:1 and 3:1 aren’t uncommon because they significantly reduce the bank’s risk.
About Kamiel Moore
Kamiel Moore is a real estate expert who lives in Houston. She loves cupcake shops, reality TV, her kids, and getting their passports stamped when they go on vacation.