Lenders make no bones about it: They are tougher on second-home
loan applications than on primary-home loans. Why? Because the
finances of a second-home buyer are, by definition, stretched
thinner. The result is that second-home rates traditionally
run one-quarter to one-half point higher than those for first
residences. Ditto for origination points on vacation-home loans.
That said, however, the current environment for second-home
lending is about as lenient as it has been in years. Banks are
healthy again and a booming real estate market has them all
rushing into the market at once. The result: heightened competition
-- especially in the second-home arena. "The typical profile
of a second-home owner is someone more affluent than a single-home
buyer," says David Totaro, chief marketing officer for
Dime Savings Bank of New York. "That's the type of person
we want to do business with."
a Home-Equity Loan
With interest rates at historically low levels, many lenders
will encourage you to take out a home-equity line of credit
on your primary residence to fund all or part of your second-home
purchase. Watch your step here. Most home-equity lines of credit
float a point or two higher than the prime rate, so you could
end up repaying this piece at a much higher interest rate than
if you had simply taken a mortgage for the entire amount. Plus,
unlike mortgage interest, which is deductible on up to $1 million
of debt on your first and second homes combined, the home-equity
cap is $100,000. (You get a break on $1.1 million total.)
you do, don't bank on starting with a home-equity loan and taking
out a mortgage at a later date. A little-known IRS rule states
that you have just 90 days from purchase to secure a mortgage
against a principal or vacation residence. Do it later and you
can't deduct it at all.
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Lenders are still sticky when it comes to renting out your second
home. Some lenders won't even write those kinds of loans; they
have a hard time selling mortgages on investment property in
the secondary market. If you find a lender that will, expect
it to scrutinize you more carefully than if you were not a landlord.
a minimum the lender will want to see proof that you're actually
going to generate a decent cash flow. Often, the lender will
ask for a cash flow statement for a property showing its rental
history. In condo communities, management companies often provide
them. If one isn't available, you'll need to get a second appraisal,
comparing the rents and occupancy rates at similar homes. This
will run an extra $300 to $600.
don't count on your bank to take all of a home's estimated rental
income into consideration. Even for a property with a long rental
history, most lenders will only consider 75% to 80% of it. Some
even take 75% after netting out your costs.
you don't need the rental income to meet the mortgage industry's
ratios, you may not want to mention to your lender that you're
thinking of renting. We're not suggesting that you lie on your
mortgage application. That's a federal offense. But if you happen
to change your mind, well, that's another story. "A lot
of people go in under the guise of buying vacation property
for personal use only to turn around and rent it out,"
says Keith Gumbinger, of mortgage-tracker HSH Associates. "I
have never heard of people getting caught."