By Doug Goelz, Mortgage Services
I have received many calls recently from clients inquiring about buying a second home. It seems that sheltering in place and dealing with kids and work at home has made a lot of people think about finally buying a getaway property.
In general, guidelines for financing a 2nd home are straightforward and similar to buying a primary residence. Rates are generally the same as for a primary residence and you have the same options for down payments: 20% down is good, but you may be able to buy with less than 20% down.
As with any purchase of a property in California, the hurdle for borrowers generally is the down payment. So, if you are considering buying a 2nd home, be sure to have in mind your source(s) of the down payment. Liquid assets such as savings and investments are obvious sources. You might also consider borrowing against assets such as equity in your primary residence, your 401(k), and your brokerage account. Loans on 401(k)s and brokerage accounts generally can be made quickly, assuming your accounts allow them. Check with you employer’s retirement plan administrator or your financial advisor for the rules governing your accounts.
If you decide you want to borrower against the equity in your home, you should set up a home equity line of credit or do a cash-out refinance in advance of making an offer on your 2nd home. That way, you will have the funds readily available when it is time buy the 2nd home.
When financing a 2nd home, be sure you do NOT intend to rent the property (including short term rentals). Loans on rental properties have higher rates and higher minimum down payment requirements than mortgages for 2nd homes, and one of the biggest categories of mortgage fraud is financing rental properties as primary residences or 2nd homes. Accordingly, lenders always want to make sure that borrowers are buying a 2nd home strictly for personal use.
To justify 2nd home financing, lenders consider whether the property is in a location typical of vacation homes (think Lake Tahoe or Napa), and an appropriate distance from your primary residence. If the location and/or proximity to you primary residence doesn’t seem logical for a 2nd home, the lender may require a letter from you explaining why the property is appropriate for you as a 2nd home. For example, if you live in San Francisco and you try to finance a condo in Oakland as a 2nd home, you will need to convince the lender that the property should not be financed as an investment property.
Mortgage rates are once again near historical lows and it could be a great time finally to buy the 2nd home you have wanted. Feel free to contact me at 415-730-4665 or [email protected] to discuss financing options for your 2nd home.
