If you’re purchasing a new house, you’ll probably qualify for a second home mortgage. On your first mortgage, you may be eligible to place as little as only 5% down, depending upon your credit rating and other individual variables. However, on a second home, you’ll likely have to place down at least ten%. This increases the risk for the lender and ensures that the loan will be paid off faster. Although these terms may seem unfavorable, there are some advantages of second mortgages that you should consider.
Homeowners often purchase homes with the idea of selling them after they complete their term. Unfortunately, this often does not happen. Many homeowners are just not ready to move up to another residence after the initial payments have been made. In these cases, these homeowners will find themselves in the position of needing a second home mortgage loan.
When you refinance for a second home mortgage or a consolidation loan, you have the option of choosing to secure or refinance your loan against your personal residence. There are advantages and disadvantages to both options. For example, securing your loan against a property that is used for business purposes will result in higher interest rates. This is due to the fact that the lender has capitalized on the current value of the property and knows that the property will appreciate in value. This higher interest rate will make it more difficult for you to get an investment property at the same price.
If you have bad credit, this may also prevent you from obtaining a second home mortgage loan. Lenders are unlikely to give you a loan if you have bad credit because of the higher interest rates associated with it. If you do have poor credit, however, then you can work with your lender to develop a repayment plan that you can follow. You should also inquire as to the possibility of lowering the interest rate on your first mortgage to help improve your credit score.
You should also ask your second home mortgage lender about the qualification requirements for the type of financing you plan to use. With a consolidation loan you must meet certain occupancy requirements as determined by your lender. You will probably be required to either have low to medium debt-to-income ratio or very low debt-to-income ratio. The lower the ratio, the more likely you will qualify. The higher your debt-to-income ratio, the more likely you are to qualify for financing with reasonable interest rates.
One of the second home mortgage requirements is having a sufficient income to qualify for the loan. If your income is lower than the median income in your state, then you may not be able to qualify for conventional loans, especially if you have other debts at present. In this case, you would need to look for an alternative type of financing option.
The last requirement is a good credit rating. Most second home mortgages do not require a credit score; however, many companies will check credit reports before offering you a second mortgage loan. When you apply for a Freddie Mac loan and are declined, most often it is because you have a poor or non-existent FICO credit rating. However, there are some very good companies that do offer second home mortgages despite having poor credit ratings.
So, as you can see, there are some important differences between a conventional loan and a second home mortgage. It is important that you familiarize yourself with second home mortgage requirements and what you need to do to get approved. Then, when you are ready to purchase a house, you can focus on getting the financing you need at the best possible rate. Good luck!