Finding a second home that you can use for an investment property or as a vacation property is great, but being able to finance it may be a different story. In many cases, getting a mortgage for a second home is similar to getting a mortgage for your primary home, but there are some differences. Here are some tips you can use for financing a second property which you plan to use to rent out or keep as a vacation getaway.
1. Try smaller banks and lending institutions. For people looking to buy a second home, a down payment will be required before you will be considered as “loan worthy.” In many cases, that down payment will have to be significant, which is usually between 10 and 20 percent. However, if you shop around, you can often find banks and lenders that will be a little more lenient if you meet other qualifications, such as a good credit score, you may find a lender that will look at your specific situation and make a decision on how much of a down payment you will need to get the process rolling. Smaller banks are great for this because they typically know the local market better than the big banks and they often have more flexibility.
2. Ask if the owner is willing to finance the property. There was a time when sellers would be suspicious of buyers if the buyer asked for owner financing. Those were the days, however, when almost anybody could qualify for a mortgage. But these days, with fewer and fewer people able to qualify for a home loan, many sellers are willing to finance their property just so they can be out from under it. You may have to do a little bit of selling on your part to convince the owner that you are trustworthy and that you will pay the loan off according to the agreed upon terms, but this method could work out great for all parties involved.
3. Make sure you have enough money in reserve. Buying a second property, whether as an investment or vacation property, can still have the same problems as buying your primary residence. You may need to make repairs right away and there may be other costs that you don’t think about until it comes up. That’s why it is essential to have some funds reserved in your bank account. As a general rule, have about six months worth of payments for each investment property that you own to make sure you are not stretching yourself too thin financially.
4. Maintain your credit rating. Just because you qualified for a home for your primary residence several years ago doesn’t mean you will qualify now. The credit restrictions have gotten tougher and fewer and fewer people are qualifying. Even if you have your primary residence as collateral, it is important to maintain your credit rating if you want to invest and finance a second property. Pay off some bills and reduce your debt-to-income ratio before applying for a mortgage on a second home to help ensure that you will qualify at a decent interest rate.
These are just a few of the things to keep in mind if you plan to invest in a rental home, an investment property or a vacation home where you can spend several months out of the year. By following these tips, you can increase your chances of getting approved for another mortgage and make sure you are in a financial position to own a second home.
Compare local mortgage rates on second homes and investment properties here.
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