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Loan requirements for a second home

Second home with a for sale signThinking about a second home? Do you yearn for a second home that's peaceful and relaxing? Most people do, but how do you finance a second home?

The easiest way to purchase a second home is to take out a home equity loan against your current home, but if that's not possible due to insufficient equity or you choose to avoid using your home as collateral, then your best option is to obtain a mortgage for the second home.

There are three popular government backed mortgage programs, FHA, VA and the USDA home loan programs. Unfortunately, the government backed loan programs prohibit second home financing, but, the Federal National Mortgage Association, better known as Fannie Mae will back second home loans. Fannie Mae does not provide mortgages directly to the borrower, but works with approved lenders to provide mortgage financing, provided that the lenders meet Fannie Mae's lending guidelines. Here are some of the ground rules:

Second Home Requirements

  1. cannot be subject to any agreements that give a management firm control over
  2. the occupancy of the property
  3. is restricted to one-unit dwellings
  4. must be occupied by the borrower for some portion of the year
  5. must be suitable for year-round occupancy
  6. must not be rental property* or a timeshare arrangement
  7. the borrower must have exclusive control over the property

* you can rent out a second home for a portion of the year, you must occupy the property for 10 percent of the number of days it’s rented out for it to count as a second home

Second home down payment

The minimum down payment for a second home loan is only 10% for both fixed rate and adjustable rate mortgages if the loan is evaluated by an automatic underwriting system. However, if the mortgage is manually underwritten, the down payment is determined by the credit score and debt to income ratio.

Second home mortgage credit score and DTI

As previously stated, the minimum down payment for a second home mortgage is dependant on the credit score and debt to income ratio for manually underwritten loans. If you're not familiar with the term, take a few minutes to read Debt to income ratio for buying a home.

In short, lenders add up all the monthly credit obligations (including the proposed mortgage payment) and divide the total monthly debt payments by the monthly gross income to arrive at the debt to income percentage.. For example:

       
  Sales Price  
  Down payment  
  Mortgage amount  
  MONTHLY DEBT  
  Proposed 2nd home mortgage payment  
  Current mortgage payment  
  Auto loan Payment(s)  
  Minimum credit card payments  
  Other  
  Other  
  TOTAL  
     
  Gross monthly income  
 
  Debt to Income Ratio  
 
Debt to Income36% (or less)36% (or less)45% (or less)45% (or less)
Credit Score640680680700
Minimum Down Payment Percentage25%10%25%10%

Source - FANNIE MAE ELIGIBILITY MATRIX

Maximum loan amount

See jumbo loan

Seller paid closing costs

The seller is permitted under the Fannie Mae second home mortgage rules to pay a percentage of the buyer's closing costs. The amount of the seller concession is limited by the down payment percentage.

Rotating question markFrequently Asked Questions About Second Home Mortgages

Q. How much mortgage can I afford for a second home?
A. Call the lender who handled your mortgage on your current home, or speak to your bank's loan officer.

Q. What is the current mortgage rate for a second home?
A. See below

Q. Can I use my VA loan to buy a second home?
A. The VA home loan program is for owner occupied principal residences only. No second homes

Q. Can I get an FHA loan for a second home?
A. Technically yes. The FHA will permit a second home loan if certain conditions are met. See Can I get an FHA loan for a second home? Second home guidelines