If you remember anything about purchasing your first home, it was probably stress. Stress about coordinating the mortgage, finding the right home, researching the neighborhood, submitting an offer and getting the down payment together. There are a lot of moving parts to purchase home.
However, when you purchase your vacation, or a “first, second home," it doesn’t have to be as stressful as the first time. First of all because you have already been through the process. But also because this guide will walk you through the basic things you should know, so there are no surprises.
Government Loans: there are none
There are no government loans available for second homes. So don’t bother looking. FHA (Federal Housing Authority) Loans are designed to encourage homeownership and are frequently used for first-time home buyers. These loans are not available for vacation or rental properties. The same restrictions apply to USDA loans, 203ks and VA loans. Government loans are only available for your primary residence.
Yes, because it’s the government there are always exceptions to the rules. In some situations, you can get an FHA loan for a second home if your current FHA loan is insured by the FHA and either you got a new job that requires you to move, or your family requires larger accommodations.
You need a traditional mortgage
You are allowed to purchase a vacation or investment property using a conventional mortgage. You can purchase:
- Condominiums and townhouses
- Single-family homes
- Duplex, triplex and 4-unit properties
You will have to pay a higher down payment, probably between 10 and 20 percent of the mortgage. There are also stricter loan-to-value requirements.
Finally, ask the lender about the costs they cover and don’t. You will need to set up a budget to address these costs like paying for inspections, etc.
Since this is a second home, you also need to pass the debt-to-income ratio. Keep in mind, that you need to have enough income to cover both mortgages. For most mortgages, you cannot have more than a 41 percent debt to income ratio. To calculate your ratio, you add up all of your monthly credit payments, such as loans, credit cards and your current mortgage plus the estimate second mortgage and divide it by your monthly pre-tax income. In some cases, if you are purchasing a rental property, you are allowed to include anticipated rental income in the calculations.
You must have a minimum credit score of at least 620. But, strive for a better credit score because the higher your score, the better your loan treatment. You can improve your credit score using the following strategies:
- Don’t open new accounts: opening new accounts can drop your credit score for a short period of time
- Don’t close accounts: the average age of your credit accounts composes about 15 percent of your credit rating. Let them close on their own unless it costs you money to keep them open.
- Pay down credit card debt: credit utilization refers to the amount of credit you are using at any given moment and represents about 30 percent of your credit rating. Pay down your credit cards to about 15 percent of their total balance and you will see your credit improve.
Vacation or Investment home?
There are different tax treatments depending on if you are purchasing a vacation home or investment property. If you are purchasing a vacation-rental property combination, the amount of time you decide to spend at the vacation home will impact how you can treat the house. You should consult with a tax attorney prior to filing your tax return.
Get a real estate agent
Find a real estate agent, such as Steele San Diego Homes, who specializes in the San Diego market. A real estate agent can streamline the process to help you find the perfect property for your vacation home or investment property. Also, keep in mind that where you might purchase a vacation home is not necessarily the optimal place for an investment property.
Steele San Diego Homes rely on straightforward approaches and flexibility to assist clients. They offer a variety of options for people to view homes including, Facetime, Facebook Live and other options for people to remotely view homes. Steele San Diego Homes is committed to fun and approachable ways of purchasing homes.