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Your Guide to Financing a Second Home

By Steven Roberts Updated on 12/22/2014

financing your second homeFinancing a second home mortgage is challenging, but possible. We will discuss the methods available to homeowners to alleviate some of the funding burden. Depending on the financial circumstance, you may borrow from yourself, spend your savings, pull a new loan or combine the options as a hybrid. The most difficult task is convincing your lender you are trustworthy, while satisfying the underwriting guidelines.

Eligibility Requirements

  • Debt-to-Income ratio below 45% including the new mortgage
  • 6 months' cash reserve for both mortgage payments, taxes and insurance
  • Located a reasonable distance from primary or in a “resort” style area
  • Minimum down payment of 20% is preferred

Financing Options

Cash Purchase

Surprisingly, one of the primary sources for funding a second home is cash. Many successful homeowners have generated sufficient cash from business ventures, investing, saving and inheritance. The baby boomer generation is nearing retirement and some have saved enough for affordable homes located in tranquil, nature-friendly communities for vacation or retirement.

Hybrid (New Mortgage & Home Equity Loan)

The most favorable down payment source is equity from the primary residence. Equity essentially allows you to borrow from yourself, without refinancing the entire mortgage. This however is probably not enough to purchase the second mortgage outright, so a home loan will be needed to supplement the remaining cost. If you do not intend to rent out the property for income, you can still satisfy the requirements for conventional 30 year and 15 year fixed-rate mortgages backed by Fannie Mae and Freddie Mac. Optional adjustable-rate mortgages are available as well. Read more about hybrid mortgages here

Cash-Out Refinance

A cash-out refinance could alleviate more cash than available equity from your first home mortgage. This could be beneficial for investing in a second mortgage, however as you refinance you will have increased your debt to income ratio and may affect your chances for approval. Cash-out refinancing will typically raise the interest rate and increase the principal amount of debt. This option would be ideal for younger, more financially fit generations that intend to use one of the mortgages for a rental property. Keep in mind that rental properties will incur higher interest rates.

FHA Loan For New Primary Residence

In order to qualify for a government assisted FHA loan, you must qualify based on specific circumstances. FHA loans will help to secure a new primary residence and allow rental of the current primary residence for supplemental income. In order to qualify you must have 25% equity in your home. The extentuating circumstances that qualify are as follows:

  • You have been relocated to a job that is over a 50 mile commute one way
  • Your family size has changed and the home is now unfit for comfortable living
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About The Author:
Steven Roberts
Steven Roberts is an editor for Lender411. He specializes in mortgage and finance. Steven graduated from Cal State Long Beach. Contact him at Steven@Lender411com.

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