Obtaining a mortgage for a second home for vacation or retirement purposes is not all that different from the process you went through when buying your primary residence. Of course, there is typically more scrutiny from your lender and the underwriters when submitting your application, but this is mainly because they want to be sure you can afford to pay both mortgages as well as taking into account your debt. Many people mistakenly assume that trying to obtain financing for a second home requires additional steps or hoops to jump through, and this isn’t the case at all. You will have to supply the lender with all the normal paperwork required for a first mortgage, but you won’t have to promise them your first born.
When you applied for your first mortgage, everything depended on your income, and with your second mortgage this will be true as well. The lender will usually require that you can submit proof of a reliable and continual income source that can cover both your new mortgage as well as all other debt obligations you currently have. Your income will be included in the formula known as the debt to income ratio, or DTI. This formula will contrast your monthly gross income with your monthly debts. Debts that are included in DTI consist of things like your first mortgage, credit cards, auto loans, student loans and other revolving accounts. Your lender will divide your debt by your gross monthly income and then multiply it by 100 to obtain a percentage. Most lenders want to see a debt to income ratio below 31 percent.
Most lenders want to see a stable and positive credit history when reviewing a loan application, especially if the mortgage will be for a second residence. Making payments on time and not carrying consistently high balances on revolving accounts can go a long way to making your application for a second mortgage look favorable to an underwriter. Any negative items such as tax liens, unpaid child support or judgments will make an application look far less desirable to an underwriter.
Cash On Hand
Your lender will need to be sure that you have the necessary cash on hand to pay your down payment, closing costs and first monthly payment. This includes other items such as taxes and insurance as well. Most applicants will need to be able to show these funds in a checking account or a savings account.
Equity in Your Current Home
If you have considerable in your primary residence, you may be able to use that as a down payment on your second home. Check into a home equity loan which could save you a significant amount of money. Some lenders even offer home equity loans without closing costs. Not having to pay closing costs can make a larger portion of your cash available for a down payment. Utilizing a home equity loan is a smart way to help lessen the amount of money you’ll need to finance which can often help speed up the approval process.