Loan Requirements for a Second Home

Thinking 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: