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Mortgage Rules for Second Home Buyers

Mortgage Application Form with Approved Stamp and Pen

Have you been considering buying and financing a second home, but are not sure what the mortgage rules are? If so, then you are definitely not alone. Many people who are considering buying a second home have a variety of questions and are uncertain about the process.

For example, homebuyers and investors alike often wonder if they have to pay another 20% down payment on their second mortgage. Others are unsure of the requirements for obtaining financing for another home.

Rest assured, here you will learn more about how to buy a second home and will obtain the answers to many frequently asked questions about this topic.

Second Home Financing

There are several reasons that people consider buying another home and therefore find themselves looking for a second home loan. For example, some people purchase additional properties to serve as vacation homes. Others may buy another home for investment purposes. Regardless of your intent, if you own a home and are looking to secure financing for another property, then you need to know the mortgage rules.

Fortunately, if you have purchased a home before, then you already know everything you need about financing a property. The exact same process will be used for purchasing a second home; however, due to the higher chance of default (due to the extra debt of already having a home) the lender may require you to pay higher mortgage rates and a higher down payment on your second home loan.

Specifically, the down payment tends to range from 10% to 25% on second mortgages; however, you should shop around and try to find the best rate. For example, you may be able to get lower down payments on a FHA or VA loan. It is essential to note that there are specific requirements that will vary depending upon your lender and the loan in which you are looking to apply that should be researched beforehand to make sure you qualify.

Your Credit Score Matters

As with financing your first property, your credit score is important and still comes into play when securing a second home loan. In fact, lenders will expect you to have a relatively-high credit score if you are seeking a second mortgage. Having a high credit score will help increase the lender’s confidence in approving you for the home loan.

Your Income Matters

Along with your credit score, your income is pertinent. As mentioned earlier, there is a higher chance of default when someone has two home loans; therefore, the lender will need financial proof that you can afford both mortgage payments. Be prepared to provide proof of income over the last two years.

What is Loan to Value?

In addition to your credit score and proof of income, the loan to value ratio is still relevant when applying for a loan for a second home. Lenders use the loan to value ratio to determine its risk in approving you for the mortgage.

For example, if you are seeking a loan for $150,000 and the property value is $180,000, then the loan to value ratio is 83%. The lower the ratio the less risk for the lender and therefore the higher the chance of approval.

More details about what Loan to Value means, how to calculate it and why having a good ratio is important could be found in this article.

Mortgage Interest Deduction

Aside from financing, your second mortgage may also qualify for a mortgage interest deduction in which you can deduct your mortgage interest when you file your IRS taxes if you use an itemized filing. If you purchase a second home this year, make sure to ask your accountant if your second mortgage qualifies for interest deductions.

At the end of the day, when seeking to finance a second mortgage it is essential to understand that the lender will take into consideration everything from your credit score and income to the loan to value ratio when making a decision on whether they should approve your application. You should always shop around and try to find the lender that not only offers the best mortgage rates and lowest down payment requirements, but also that has a solid reputation.

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