Perhaps you’re moving to a new home, you’re investing in property, or feel like you finally have to scratch that itch on the vacation home you’ve always wanted. Though it is often more difficult to secure a mortgage when buying a second home – lenders just consider them to be a higher risk – finding and financing a second home doesn’t have to be a fiscal nightmare.
Here are a few simple tips on how to finance a second home more easily:
Keep Your Credit in Check
Make sure your credit score is between average or above-average. There are more programs available for first-time homebuyers than there are for those looking to move or buy a second home. Pay your credit cards and bills on time and keep your debt-to-income ratio in check for better chances at landing a firm loan.
Manage Your Debt
Your lender needs to see that your debt-to-income ratio is manageable, and should not exceed much above 40%. Detail a report for your bank that outlines your student loans, car payments, mortgages, utilities and any monthly expenditures you have working against your gross income.
Detail Your Renovations
If you’re looking into making renovations, compose a detailed proposal to present to your lender. Outlining your intended improvements to a property will assist in convincing them that their return in investment will most likely be worth the risk.
Know the Hidden Costs of Renting
For those interested in purchasing a property and then renting to a tenant—take into account that the property might not always be tenant occupied. If one of your homes has foundational issues, hasn’t been inspected, or is in an undesirable location, you may face setbacks on getting a return on your investment. Call for inspections on both properties before committing anything to paper. Being a landlord is a job in itself and should be treated as such.
Take Insurance into Account
Do not forget to include the cost of insurance (title, hazard, liability) in your projected budget for a second home. Often a second home’s insurance will be higher than one for your first home. Call local agencies and budget accordingly. What is the weather like in the new neighborhood? Are there large trees on the property? There are many factors to insurance quotes -- Know the area.
Save. Then Save Some More
How much money can you put aside for your second home mortgage and down payment? If you are selling your first home to finance the second home, don’t count your chickens until they hatch – setting aside a minimum of six-months note payments for both properties is recommended. You'll need this buffer to ensure that you can make payments on both homes while you get the first home moving on the market, not to mention to help get some loans approved. Remember: The bigger the down payment, the less interest you will have to pay overall.
Prepare For Taxes
Taxes for two properties can become quite troublesome. If you are buying a second home out of state, it is best to look into property taxes (both locally and through a state agency). Looking to add a deck to your second property? It may incur unforeseeable penalties. There are some good tax loopholes to take advantage of, however:
The amount of time you spend in a vacation property can drastically affect how much you owe in income taxes.
Buying a home outside of a major city or municipality can greatly reduce the amount of property taxes you will owe annually.
Talk to multiple lenders and see what advantages their loans have. Can your real-estate agent negotiate a deal on closing costs? Can you get lower interest rates through another lender?
If you'd like to learn more about buying a second home and how to more easily secure financing, please feel free to contact The Atlanta Homes for more information on how to buy a second home.