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Buying a second home is an exceptional opportunity. You can expand your real estate portfolio, creating an investment strategy for building wealth over the long term. It’s also nice to have a home, one you can use on the weekends to get away. Whether you want to buy a home on the beach, on a lake in a densely wooded area or a home across the country, your first step is securing financing.
Purchasing a second home does mean more responsibility. It may mean a second mortgage, insurance costs and property maintenance. You’ll be paying utilities, upkeep and taxes on a multiple properties. Using this information, calculate how much you want to spend each month in these areas. Then, you can start looking for the home that fits.
Buying a second home affordably is easier to do when you can apply a sizable down payment. Most often, home buyers need between 3 and 20 percent of the purchase price available as a down payment. The more you have, the less you finance or the larger of a home you can safely purchase.
With second homes, you may have additional avenues for securing that down payment. This includes savings, of course, but it may also include borrowing against the equity in an existing home to use as a down payment.
One of the challenges of buying a second home is proving to lenders you can afford the mortgage payment and other costs. There are loan programs available to help you, but the options are somewhat limited in terms of federally sponsored programs. You may have used a VA or FHA loan, for example, to purchase your first home. These are generally just for the primary residence, not second homes.
However, there are other loans available to you. Conventional loans, which are still some of the most commonly sought-after loans available, are available to most people. Lenders will look at things such as:
Like any other home loan, it will be backed by the value of the home you purchase. In that way, the home must be worth at least as much as you plan to borrow.
Debt-to-income ratios tend to be a big factor for most lenders. Fannie Mae-based loans often require a ratio that is up to 45 percent if you have at least 25 percent down and a moderate credit score. That means your monthly payments need to be under 45 percent of your gross income.
It’s also important to consider how you plan to use the property. Lenders need to know if the home will be vacant (getting insurance for it can be difficult). They also want to know if you plan to produce a second income from it. If so, you need to ensure your loan covers this type of use.
The good news is that most conventional lenders off second home loans. Find the dream home you’ve been looking for, and then work with a lender to secure the purchase.
Kathy Borawski is a Northampton native who started in the Real Estate Industry in1985. She is a product of the Northampton public schools and a Northampton taxpayer, landlord, and co-founder of HARP, The Hampshire Association of Rental Properties, and a 3rd generation real estate broker, having learned the business from her father.
