Recently, I spoke with Bob Tedeschi of The New York Times as he was researching and preparing information to publish his article, “Rethinking Vacation Homes.” The timing of our conversation was opportune as current mortgage rates remain relatively close to historic lows, while home values are also at their lowest point in years. I mentioned that homeowners looking to purchase a second home – or refinance an existing second home – should consider their options now, before this once-in-a-lifetime opportunity is lost.
As we all know, obtaining a second home mortgage loan has become significantly more difficult due to tighter lender guidelines, and stricter requirements and regulations. Although qualifying for a second home mortgage loan has become increasingly more difficult, affordability has also become considerably more favorable. In order to take advantage of the affordability, however, borrowers must have pristine credit and a larger down payment.
A few things to consider when purchasing a second home include:
• Second homes must be located a reasonable distance from the borrower’s primary residence
• Second homes must be occupied by the borrower for a portion of each year
• Second homes are limited to one-unit homes
• Second homes must include utilities suitable for year-round occupancy
• The borrower must have sole control of the second home
• Occupancy of second homes cannot be controlled by a management agency
• Second homes may not be rental properties or timeshares
Just three short years ago, borrowers were able to obtain subprime mortgage loans for second homes, which consisted of a loan-to-value (LTV) of up to 95% with a credit score as low as 560, without having to pay mortgage insurance. Subprime mortgage loans are primarily responsible for fueling the current housing crisis we are experiencing today. The days of this type of loose lending are in the past, and are also the motivation behind the stricter guidelines today.
Today, the basic rule of thumb for obtaining a mortgage loan on a second home is to have a 20% down payment when purchasing, or 20% equity in the home on a refinance, which would negate the necessity of mortgage insurance. That said, one mortgage insurance company in particular has recently relaxed their restrictions and has allowed mortgage insurance on a second home with an LTV up to 90%. Along with the relaxation of this LTV guideline comes with restrictions, however. For example, in order to obtain mortgage insurance on a second home with an LTV of 90%, the second home cannot be located within one of the following states: Arizona, California, Florida, Michigan or Nevada. The rationale behind this mortgage insurance company alienating these states lies in the high degree of home foreclosures in those states. Additionally, borrowers must possess a credit score of at least 720, have a debt-to-income (DTI) ratio at or below 41%, and have at least two months PITI (principal, interest, taxes, insurance) in liquid reserves.
If that weren’t enough, possibly the most-restrictive of all second home properties to obtain a mortgage loan is on a condo. The reason condos are so difficult to obtain a second home mortgage loan is due in large part to occupancy requirements established by mortgage lenders. Overall, mortgage lenders require a minimum of 70% of all condo units to either be owner occupied or second homes, which translates to no more than 30% of the condo units being rental units. Condos are a big red flag in general, so if it’s a second home, it’s even worse.
Generally, the higher the loan amount, the higher the credit score requirement; the lower the LTV, the lower the DTI requirement. While it appears on the surface that the housing market is showing signs of stabilization, many prominent analysts are predicting significantly higher mortgage rates in the very near future as the Federal Reserve fulfills its commitment by the end of the first quarter of 2010 to purchase $1.25 trillion in mortgage-backed securities.
Consequently, if you’ve been considering the purchase of a second home, or you’re on the fence about refinancing your second home, I strongly believe the time may never be better than it is today.