Financing your second home
Julie Garton-Good, GRI, DREI

Many Americans today are thinking of purchasing a weekend cabin they can drive to in a few hours or perhaps a second home several states away from their current residence. But obtaining financing for a second home can sometimes be a bit frustrating and intimidating.

That need not be the case. If a second home is in your future, here are the financing facts you'll need to talk about with the lender to obtain the loan you need.

The first thing you should realize is that the lender views loaning money on a second home somewhat differently than loaning money on your primary home. The rationale is that since you have a primary home, if financial "push comes to shove" for you, you might let the payments go on the second home and preserve your primary residence. That's why most qualifying and underwriting guidelines are stiffer on second-home loans. Additionally, the secondary market where the lender sells the second-home loan has different requirements for qualifying borrowers of second-home loans. Let's review them.

Although qualifying varies from lender to lender, most second-home loans require a 20 percent down payment. This is true for both an existing home and for a new second home that you plan to build. And the 20 percent down applies to both fixed-rate and adjustable-rate mortgages. It's often tougher qualifying for a second-home mortgage because the lender will count not only your long-term revolving and installment debt (like credit cards and car loans), but the payment you're making on your first mortgage as well. This often disqualifies the potential borrower or at least minimizes what he/she can qualify for.

There is one leverage tool that might give you the extra edge you need. You could combine a 75 percent first mortgage (with a 10 percent down payment) and ask the seller to carry back 15 percent of the purchase price in seller financing. This is allowable by the secondary market that purchases second-home loans and will allow you to sidestep private mortgage insurance (PMI) because your first mortgage is less than the 80 percent loan generally requiring PMI. In addition, you can probably save a bit on interest by selecting a 75 percent loan over an 80 percent and negotiating the repayment terms with the seller. (Most lenders, however, frown on balloon payments to sellers in fewer than five years because it puts too much strain on repaying the first mortgage). With creative combinations of traditional and seller financing, you should be well on your way to financing that second home you've been dreaming of.