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Loan Requirements for a Second Home

Second home graphicDo you wish you had a tranquil and relaxing second home? The majority of people do, but how do you afford a second home?

The simplest approach to buying a second home is to take out a home equity loan against your present home, but if this isn't possible due to insufficient equity or you don't want to use your home as collateral, your best alternative is to get a second-home mortgage.

The FHA, VA, and USDA home loan programs are three government-backed mortgage programs.

Unfortunately, the government-backed loan programs prohibit second-home financing. Nevertheless, Fannie Mae, the Federal National Mortgage Association, will fund second-home loans.

Fannie Mae does not directly issue mortgages to borrowers; instead, it works with approved lenders to provide mortgage financing, as long as the lenders follow Fannie Mae's lending requirements.

Here are the second home guidelines to follow:

  1. Second home requirements include the following: the property must be occupied by the borrower for at least part of the year;
  2. the property must be suitable for year-round occupancy;
  3. the property cannot be a rental property* or a timeshare arrangement; and the borrower must have sole control over the property.
  4. You must have complete control over the property; * you may rent out a second house for a part of the year; however, you must occupy the property for 10% of the days it is leased out in order for it to qualify as a second home.

Down payment on a second property

If the loan is evaluated by an automated underwriting system, the minimum down payment for a second home loan is merely 10% for both fixed-rate and adjustable-rate mortgages.

The down payment is calculated by the credit score and debt-to-income ratio if the mortgage is manually underwritten.

Credit score and debt-to-income ratio requirements for a second home mortgage

The minimal down payment for a second home mortgage is determined by the credit score and debt-to-income ratio for manually underwritten loans, as previously indicated.

Take a few minutes to study the Debt to income ratio for buying a home if you're not familiar with the term.

To calculate the debt-to-income ratio, lenders total all monthly credit commitments (including the projected mortgage payment) and divide the total monthly debt payments by the gross monthly income.

Consider the following scenario: 

       
  Sales Price  
  Down payment  
  Mortgage amount  
  MONTHLY DEBT  
  Proposed 2nd home mortgage payment  
  Current mortgage payment  
  Auto loan Payment(s)  
  Minimum credit card payments  
  Other  
  Other  
  TOTAL  
     
  Gross monthly income  
 
  Debt to Income Ratio  
 
Debt to Income36% (or less)36% (or less)45% (or less)45% (or less)
Credit Score640680680700
Minimum Down Payment Percentage25%10%25%10%

Source - FANNIE MAE ELIGIBILITY MATRIX

Maximum loan amount

See jumbo loan for further information.

Seller paid closing costs

Fannie Mae second home mortgage guidelines allow the seller to pay a percentage of the buyer's closing costs.The amount of the seller concession is determined by the percentage of the down payment.

Rotating question markFrequently Asked Questions About Second Home Mortgages

Q. Is it possible to use a VA loan for a second home?
A. A second residence mortgage is not available by the VA; only homes that are occupied by the owner are eligible.

Q. Can an FHA loan be used for a second home?
A. The FHA does not permit second home financing. But, there are employment-related exceptions. See Can I get an FHA loan for a second home? Second home guideline

Q. Can I rent my home?
A. In most circumstances, conventional and FHA home loans require a minimum of one year of occupancy before renting the property. Before converting the dwelling to a rental home, it's a good idea to talk to your lender before making the conversion.

Q. Can I buy a vacation home with a VA loan?
A. The VA home loan program is only for primary residences that are owned by the borrower. Second home financing is prohibited.

Q. Can I buy a second house with a FHA loan?
A. Yes, technically. If certain conditions are met, the FHA will approve a second mortgage.

Q. Can you buy a second house with less than a 20% down payment?
A. Most likely. The amount of money needed for a down payment is determined by the debt-to-income ratio.

Q. Can a USDA loan be used to purchase a second home?
A. If your current loan is a USDA guaranteed loan and you have lived in the house for at least three years, you are allowed to utilize it as a second residence.

Q. Can you qualify for a mortgage based on projected rental income?
A. Fannie Mae requires that if the subject property is used for qualifying purposes and will produce rental income, one of the following Fannie Mae forms be used to demonstrate the property's income-generating potential:

Single-Family Comparable Rent Schedule (Form 1007) (supplied with the corresponding appraisal report) for one-unit residences, or

Small Residential Income Property Appraisal Report is for properties with two to four units (Form 1025).
For second home finance, see Fannie Mae's criteria. Fannie Mae guidelines for second home financing

Q. How much of a second-home mortgage can I afford?br /> A. Contact the lender who handled your present home's mortgage or a loan officer at your bank.

Q. What is the current second-home mortgage rate?
A. See the list below.