Second Home Loan

While for primary residence, loan conditions are considered generally advantageous, with a second home loan, things get tougher. You will pay more on second homes, even if your budget is already stretched thin. People who apply for a second home loan are certainly more affluent than the regular one-property owner, and this is the very general profile of the borrower.

Some lenders encourage customers to take a home-equity loan for their main residence and use the amount to pay partly or fully for the purchase of the second home. However, this may not be as advantageous as you think, since on the one hand, home equity lines of credit have a higher interest rate than a simple mortgage, and on the other, you'll deduce less from the debt.

If you purchase a new property for renting purposes, then, things get even more complicated. For such cases, the approval of a second home loan depends on proof that the property is going to generate a decent cash flow. The lender will also ask for the property rental history as well as for an appraisal with comparisons of rents and occupancy rates.

The DOWN PAYMENT is also highly important when shopping around for a second home loan. This could be higher than what the amount you paid for the primary residence. The percentage can vary between 10% and 50% of the value, depending on which loan program you qualify for. Just like with the first home loan, a private mortgage insurance will be necessary if the down payment is lower than 20%.

The DEBT-TO-INCOME ratio or DTI shows your financial situation and indicates whether you can afford a second home loan or not. The debt-to-income ratio is calculated by taking into consideration the current monthly home rate, the future monthly payment for the second home and other existing debts (credit cards, other loans, insurance etc). The debt picture changes a little if your second home will be used as an income property. In general lines, the DTI should be of 36% or less.

The CREDIT SCORE has its role to play when you consider contracting a second home loan. And things work in a similar way to the first home loan. However, many lenders require a higher credit score for secondary residences. Usually, the score ought to be higher than 660, otherwise, you have low chances of getting a second home loan. Even if the score is higher than 660, you still need to improve it so that you may enjoy better loan conditions.