How to Buy a Second Home
[image error]The housing market recovery, fueled by record low interest rates, is still going strong. The average interest rate on a 30-year fixed-rate mortgage fell to 3.72% in mid September, according to the Mortgage Bankers Association Mortgage Index, the lowest rate in the history of the survey. And Fed chairman Ben Bernanke recently announced efforts to further stimulate the economy and keep interest rates low until 2015.
All this has not only peaked the interests of home buyers and owners seeking to refinance, it’s also lifted the market for second-property buyers. (Farnoosh covered a similar story back in 2009 during the height of the recession.) The National Association of Realtors estimates last year vacation-home sales rose 7% and investment-home sales surged 64.5%. Together they accounted for 38% of all market transactions.
For those who are interested in getting in on the action, consider these tips:
Be Patient
Generally speaking, banks have tightened their lending practices since 2008 for obvious reasons. Obtaining your first mortgage can be challenging enough – but securing a second home loan? The standards become even stricter and the process longer, as banks worry you may be stretching yourself too thin with two mortgages, according to Michigan mortgage broker Jim McDonald. He says most banks ask for a so-called Letter of Explanation as to why you want to a second property, in addition to the the usual underwriting that checks your credit and debt-to-income ratio.
If you’re planning on renting the home and using it as an investment property, the bank may then request a cash flow statement that shows the property’s rental history, among other items. As for your personal financials – you’ll need to be up to date on payments for your primary mortgage, have a good credit score (we’re talking 740, 760 or better) and 20% in cash for a downpayment to earn a low interest rate.
Do Some Real Math
Before shopping around for a second home, make sure you have enough income to easily cover the cost of your existing mortgage, as well as savings equal to six or more months of expenses in case of an emergency. Then assess the annual costs of a second home which – in addition to the mortgage – will include utilities and maintenance, plus possible management company fees, which can run you three to 10% of rent. When in doubt, best to overestimate your costs!
Be Strategic About Location
Like any other property, the location of your second home is essential. Of course, you’ll want a spot that’s conveniently located and that you can visit as much as possible (and possibly retire to down the road). Additionally, assess the area’s rental market in case you ever decide to become a landlord. Speak with local realtors to get a sense of the rental market and average rates. You can also check real estate site Zillow.com for up-to-date, local market activity. Currently, across the country, landlords are making out quite well. Housing vacancies are at a 5-year low, according to recent Census data, and the average rent paid nationally has risen to an estimated $871 per month!
Photo Courtesy, Svenstorm
