A: Interest rates are similar for primary residences and second homes. Due to the fact that the default rate is greater on second homes, the underwriting guidelines are more stringent; most lenders require a greater amount of cash reserves than that of a primary residence. The allowable debt-to-income ratio is lower than that of a primary residence. Debt-to-income ratios are the qualifying tools that loan officers and underwriters use to analyze the ability of buyers to qualify for a mortgage. Second homes must not be subject to any time-sharing or other shared ownership arrangement, or subject to any rental pools or agreements that require the borrower to rent the property, give a management company control over occupancy or involve revenue sharing.
A second home or vacation home must be located a reasonable distance from your primary residence. If the second home is located near your primary residence, the lender may consider the home an investment property, resulting in higher rates. Some lenders have specific mileage restrictions that must be followed. Therefore, it is best to meet and discuss the financing options on a second home with a qualified loan officer before running off to buy that dream home on the beach.
Q: I have clients that are looking in Michigan and Florida for vacation homes or condos. Are the lending guidelines different in each state?
A: Lenders have different guidelines for each state, county, etc., as well as various property types. Second home condos generally have more state-specific restrictions than a detached single-family home. Some lenders may require a larger down payment in certain states, as well. Your client should always contact a mortgage lender to get pre-approved just as they would for the purchase of a primary residence, and make sure the mortgage banker is familiar with the specific state guidelines and restrictions.
Michael Murray is a Vice President of Mortgage Lending with Guaranteed Rate. He has NINE years of experience in the mortgage industry. He can be reached at 773.290.0518 or firstname.lastname@example.org.