Vail Daily column: Easing of lending rules helps second-home owners
If you own a second home and rent it out when you are not here, then you probably think of it as your second home, even though on your income taxes you treat it like a rental property declaring income and claiming a tax deduction for depreciation, condo fees and maintenance.
Many times throughout the years I have had to sit down with second-home owners and explain to them that while they see their property as primarily a second home, their lender sees it as an investment property. Ever since I got in the mortgage business 23-years ago it’s been a hard and fast rule that if the homeowner declared a penny of income on his second home and wanted to refinance, then it would be viewed as an investment property loan.
Refinancing an investment property is difficult and much more expensive that a second home. Typically the maximum loan-to-value is less and the interest rate could be as much as half a point higher. In addition, some lenders require more liquid assets (called reserves) for those who own investment properties.
But recently there was a quiet but very welcome change in this policy from Fannie Mae and as Bill Maher calls it “New Rules”. Now Fannie likes her new rules, and she makes up seemingly dozens if not hundreds of them a year, indeed the guidelines for making a mortgage loan now are up to more than 400 pages and many of them are in very fine print.
The way things now work are that if the property is located a suitable distance from the borrowers primary home (suitable being somewhat debatable, but presumably East Vail to Avon would be too close) and it can be established that the borrower occupies the home for at least a portion of the year and rents it out the rest of the time the property can be deemed to be a second home for refinance purposes if certain requirements are met.
These requirements are primarily that the rental income is not used to help financially qualify the borrower. The borrower must have sufficient income from other sources to cover his primary housing expense, his other recurring monthly obligations and the cost of carrying the second home/rental.
The second requirement is that the borrower must demonstrate that they occupy the property some portion of the year. Technically, probably a week would satisfy this one. However, if on your schedule E (which is where rental property is handled on your taxes) you declare the property was available for rent 365 days a year versus 358 days, then you might have to supply further proof. This could include showing that for a given week you used your credit card daily in the town the property is located in or possibly a letter from your local property manager (if you have one) attesting that you were in residence at the property on given dates. Other forms of proof might be acceptable such as airline tickets from your hometown to Eagle or a rental car receipt for the time you claim residency.
Second homeowners should take a look at their mortgage rates because it is likely that if you do rent your place and have refinanced in the last few years you did pay for an investment property rate. There is seldom a rate hit on a mortgage loan for a second home, but there is a big one for an investment property.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at http://www.mtn mortgageguy.com.
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