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The Real Deal
Financing the second home can be tricky
Many Americans today are thinking of purchasing a weekend cabin they can drive to in a few hours or perhaps a second home several states away from their current residence. But obtaining financing for a second home can sometimes be a bit frustrating and intimidating.
That need not be the case. If a second home is in your future, here are the financing facts you'll need to talk about with your lender to obtain the loan you need.
The first thing you should realize is that the lender views loaning money on a second home somewhat differently than financing your primary home. The rationale is that since you have a primary home, should a "push come to shove" money crunch emerge, you might forsake making payments on the second home to preserve the equity on your primary residence.
That is why most qualifying and underwriting guidelines are stiffer for second-home loans. Additionally, the secondary market where the lender sells the second-home loan has different requirements to qualify second-home borrowers.
Let's review them.
Although qualifying varies from lender to lender, most second-home loans require a 20 percent down payment. This is true for both an existing home and for a new second home that you plan to build. And the 20 percent down applies to both fixed-rate and adjustable-rate mortgages.
It's often tougher qualifying for a second-home mortgage because the lender will count not only your long-term revolving and installment debt (such as credit cards and car loans), but the payment you're making on your first mortgage, as well. This often disqualifies the potential borrower or at least minimizes the amount for which a borrower may qualify.
There is one leverage tool that might give you the extra edge you need. You could combine a 75 percent first mortgage (with a 10 percent down payment) and ask the owner to carry back 15 percent of the purchase price as seller financing, or obtain a second mortgage from the lender.
This is allowed by the secondary market that purchases second-home loans, and will allow you to sidestep private mortgage insurance (PMI) because your first mortgage is less than the 80 percent loan generally requiring PMI. In addition, you can probably save a bit on interest by selecting a 75 percent loan over an 80 percent and negotiating the repayment terms with the seller.
By knowing what the lender will require, as well as using creative combinations of traditional and second mortgage financing, you should be well on your way to financing the second home of your dreams.
Article reprinted with permission by Realty Times, Dec. 8, 2000.
Information provided in this column is presented by the Realtor members of the Silicon Valley Association of Realtors. Send questions on any topic to: Ask Your Realtor, c/o SILVAR, Los Altos District, 345 San Antonio Road, Los Altos, CA, 94022; call 650.949.9115; or send email to ppompei@siliconvalley-realtors.org.
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