Mortgages for Second Home | Vacation and Second Home Down Payment
Looking for mortgages for a second home, investment, or vacation home? Second homes can be an option for an investment and potentially yield a return by appreciating and be a write off when it comes to taxes. When the property produces rental income, a vacation home mortgage, investment mortgage, and second home mortgage are underwritten differently.
Interest Rates and Pricing Adjustments
Lender’s pricing for an interest rate and down payment vary when it comes to a second home loan, an investment property, and mixed use.
Having multiple FHA loans or VA loans can be more difficult than getting a conventional second home or investment property. There is a difference between mortgages for second homes and vacation homes.
Second Home Mortgage
Second homes need to be a certain distance from a primary residence and lenders will ask questions to why a borrower would need a second home near a primary residence. Here are some general guidelines that a second home loan must follow:
- You must occupy the property for a portion of the year.
- The home can only be one-unit dwelling.
- The property must be suitable for year round occupancy.
- The property cannot be a rental property nor have any type of timeshare arrangements.
- Agreements cannot be given to a management firm to control the occupancy of the property.
Vacation Home Mortgage
A vacation home mortgage is an investment home mortgage if the property is going to generate rental income. Lenders consider a vacation property as an investment property if the borrower’s intentions are to rent the home.
Second Home Down Payment
The second home down payment is 10% for a 1 unit – maximum loan-to-value is 90%. Pricing for mortgage interest rates usually improve upon putting more of a down payment on a home – pricing will improve at 15%, 20%, 25%… etc.
For a second home, you can refinance with cash out up to 75% loan-to-value.
Investment Mortgage or Vacation Home Mortgage
The down payment for a rental property is:
- 15% for 1 unit – maximum loan-to-value is 85%.
- 25% for 2-4 units – maximum loan to value is 75% for a multi-unit investment property.
When concerned about an interest rate, pricing will vary depending on the down payment or loan-to-value ratio. For example, if a borrower was to put 20% down for a 1 unit, instead of 15% down, this will avoid mortgage insurance or having to choose lender paid mortgage insurance (LPMI).
- Pricing usually improves at 25% down and 30% down payment.
- Can do a limited cash-out refinance up to 75% loan-to-value for 1-4 units.
- Can cash out up to 75% for a 1 unit investment property with the traditional Fannie Mae and Freddie Mac options.
There are options to cash out higher through portfolio wholesale lending and avoid having to do a full doc loan.
Second Home and Investment Properties Differ
Why can a borrower not say that an investment property or vacation home is a second home?
Pricing can often be more favorable for a second home than an investment property. It is important to understand the interest rate that is associated with the type of loan you are applying for. A lender will often know during the underwriting process and find out if a second home is really a second home or investment property – there are occupancy questions that will be asked.
Underwriters first look at where the primary residence and the subject property are located. Underwriters are trained to look in depth into a mortgage application and can tell if a property is a second home or investment property. Often if questioned, sufficient evidence will be needed to clear any condition added to the loan commitment/conditional approval.
Mixed Use Properties
There are loan programs that have mixed use like condotels and non-warrantable condominiums.
