Summer is here and for many this summer looks different than past years. Traveling has become more of a challenge and having your own vacation space has become more appealing. You may have found yourself in a position where the idea of a second home or vacation home is top of mind.
Purchasing a second home can be the opportunity for an additional stream of income or an investment property. It can also be used for personal use as a vacation getaway. Or perhaps a combination of the two. The second home may also serve as a retirement home in the future. There are many options available for planning and use. Here are a few tips for buying a vacation home.
Buying a Lake House or Vacation Home
Taking on a second home mortgage for a vacation home or a lake house may be overwhelming and exciting at the same time. There are some things to consider when applying for a loan for a second home. This process can be different from your first loan experience.
Down payment – When you are taking on a second home mortgage it is likely that the down payment required is higher than when you purchased your first home. The minimum down payment required is 10% however it can range from 10% to 35% when taking on a second home mortgage.
Credit score – Your credit score will need to be very high to qualify for a second home mortgage. You can obtain a home loan for your first home with a credit score in the mid to upper 600’s. For a second home mortgage you want to have a credit score of 700 or higher.
Debt-to-income ratio – Your debt to income ratio is the percentage of your gross monthly income that goes towards paying existing debts. This is a formula that helps lenders determine if you can qualify for a loan. When you are looking to get a second home mortgage lenders will want to see your debt to income ratio even lower. 45% debt to income ratio is considered good however in the scenario of a second home mortgage, 36% or less is even better.
Reserves – It is wise to ensure that you have sufficient reserve funds. This is available money that can be applied to your mortgage payment when there is an interruption in your income.
Investment property – If you are considering using your vacation home to also bring in revenue the process to obtain a second home mortgage can be a bit easier. You may also get a slightly better interest rate if the property will bring in income. The definition of a rental property is any property that is rented out for 15 more days in a calendar year.
Tax implications – Determining if your property will be a vacation home or an investment property will change the tax implication for your property.
Considering a second home mortgage is a very exciting prospect. The experienced team at Title Mortgage Solution can help you navigate the process with ease and prepare you for what to expect along the way. Give our team a call today at 603-643-1400 to start discussing your second home mortgage!