Vail Daily column: What does it take to buy a second home?
Since a large percentage of homes here are vacation homes, I often get phone calls from prospective buyers asking about the qualifications necessary to buy a second home with a mortgage.
Statistically, if things get financially tight, then borrowers are more likely to default on their second home mortgage than their primary residence, for obvious reasons. If one house has to be let go, most people would prefer it be their second home. Borrowers usually have more sentimental attachment to their primary home, and are more concerned about a roof for their family and distancing themselves from the stigma of losing a home to foreclosure.
As such, the requirements for a second home purchase are more stringent to not only make it harder to walk away, but also to provide the lender an additional layer of security in the event of a default and to choose borrowers who have some extra depth. These requirements involve a larger down payment, higher credit score, and tighter debt-to-income ratios and more scrutiny to what lenders call layering of risk.
About Down payments
If you are buying a primary residence, then you can often finance it with as little as 3 to 5 percent down payment. If you are buying a second home, then plan on 10 to 20 percent down. You will pay a higher rate and mortgage insurance if you have less than 20 percent down. You will also be scrutinized much more closely for an approval if you have less than 20 percent down. If the property you are eyeing is a condo or there is a noticeable level of short term rental activity in the complex, then you will need 25-30 percent down.
These days, much of the approval is done by automated loan underwriting programs, and the reason is so that all borrowers might be judged equally based on the merits of each file. This process eliminates human judgment calls from most decisions. But there are certain criteria built in based upon the loan request.
Among those traits of the automated decision making process are tougher standards for second home loans than for a primary residence. For example, I might run a loan through as a second home purchase and be declined. Just to see what might happen and understand the file’s weakness, I might change it to a primary residence purchase, click a few buttons and get an approval.
While such an experiment is enlightening, it is not a solution. Obviously, you can’t buy a second home and call it your primary residence unless you really intend to occupy it as such. You would normally have to show that you are selling your current home elsewhere and relocating here with a job in hand or relocating your company here. If you are relocating, then you have to justify you can make the same living here as you did wherever you came from, so changing the proposed use of the home just to get a loan approval is neither ethical or the answer.
Often, the reason for the decline has to do with a combination of low down payment, less than perfect credit or higher debt to income ratios or limited liquid assets (this is the layering of risk assessment). If the borrower can put an additional amount down on the purchase, then I can change the denial into an approval. In addition, some borrowers do not wish to disclose all their liquid assets, but increasing the disclosed amount of verifiable liquidity you have can, in a pinch, get you an approval.
Keep in mind, though, that loan approvals require a mix of acceptable income, credit score, down payment, liquid assets and a near perfect appraisal. Seldom will strength in one area have more than a minimal impact on offsetting more than the most minor of shortcomings of another area. A borrower might have a huge down payment, loads of liquid assets, a good appraisal and plenty of income, but if they have a credit score that is too low, then there is no way to get the loan approved.
The above said, every applicant’s situation is unique and the best way to determine what you can accomplish in terms of qualifying for a mortgage loan is to gather your income and asset information and call your chosen lender to discuss your situation. If you have to do this over the phone, the lender will generally have several specific questions that you may need your tax returns in hand to answer fully. Just telling the lender you make a certain income may not get you a exact answer. Often, it isn’t how much you make — it’s what line it shows up on on your tax forms.
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.mtnmortgageguy.com.