Purchasing a second home can be really exciting. Whether it is a summer home that you use to escape the cold weather or a cabin up North where you can enjoy fishing, water sports, and hiking, the excitement is all the same. Before you set out to purchase your second home, however, you have to know the stipulations that the mortgage companies set forth. Purchasing a second home is a little tougher than purchasing your first home because there is a higher level of risk for the lender. If you were to meet with financial demise, chances are you would do everything you could to keep your first mortgage afloat, while letting the mortgage on the second home become delinquent. Because of this higher level of risk, there are more restrictions on who can and cannot purchase a second home.
Fannie Mae Mortgages for Second Home Purchases
Conforming mortgages, or those that are backed by Fannie Mae, have similar guidelines to the purchase of your first home. They will very rarely entertain a loan application for a second home that has a credit score below 640 and that is if the loan-to-value ratio on the loan is less than 75%. This means that you are putting down 25% on the home. If the loan-to-value ratio is higher than 75%, the credit score minimum is 680. Of course, there are lender overlays and exceptions to these rules, especially if you have compensating factors to make up for the lower credit score – each lender is different so you will have to shop around.
Conventional lenders will look at a variety of things in conjunction with your credit score including your debt ratio, amount of the down payment, length of employment, stability of your income, and the amount of money you have on hand for reserves. A good example of a compensating factor would be: a borrower that has a 650 credit score and is borrowing 78% but has 12 months of reserves in the bank and a debt ratio of 34% on the back-end. The reserves and lower than average debt ratio (the average is 36%) makes the loan less risky, affording some lenders to provide the loan despite the lower credit score. Of course, if your credit history is blemished with many recent late payments, especially late housing payments, the loan file more than likely be declined.
Subprime Loans for Buying Second Homes
If you do not qualify for conventional lending because your credit score is below the 640 threshold and you do not have any compensating factors to make your application enticing, you may qualify for a subprime loan. These loans used to make people cringe because of the fact that many shady lenders took advantage of these borrowers that were in the lurks for whatever financing they could find. Today, there are regulations surrounding even subprime loans. The Ability to Repay Rule makes it easy to ensure that you are not being taken advantage of despite your lower credit score. This rule prevents the use of poor financing choices, such as interest only loans or negative amortization making it impossible to ever get ahead. Today, subprime loans have to be thoroughly evaluated to ensure that the borrower can afford the fully amortized payment. They are also required to keep the interest rate and fees in line, not crossing over the threshold of being outrageous.
Many people looking to purchase a second home find that they need subprime lending because FHA and VA lending is not available for second properties. These mortgage programs are restricted to primary residences only except in very unique circumstances. This means that borrowers that may have turned to FHA financing for their first home because their score was lower than conventional guidelines allow may have to turn to subprime lending for their second home. This is often true for borrowers that have a blemished credit history, including late housing payments; foreclosures; or bankruptcies. Conventional loan guidelines are very cut and dry when it comes to situations like that, whereas subprime lending has more leeway since the loans are kept on the books of the lender providing the funds, so they have a larger say in what they can and cannot accept.
There is not a minimum credit score per se, for subprime loans; every lender will have their own threshold. What they will look at, though, is the full picture of what you are providing. If you have a primary residence that you have made late payments on throughout the years, you do not paint a pretty picture for a mortgage on a second home. On the other hand, if you have cleaned up your credit history and have not had any late housing payments in the last few years and your debt ratio is in line, many subprime lenders will happily provide a mortgage for the second home.
If you are in the market for a second home, you will have to do your research. Start by finding out your credit score as that will play a vital role in the options you have. If you have a credit score that is below 640, you can either start improving your score by taking care of collections; making your payments on time; and paying off excessive revolving debt or go right to a subprime loan. Remember to shop around for those subprime loans; however, as every lender has a different idea of what type of risk they want to take into their portfolio. You can compare rates and fees for various lenders without hurting your credit score if you apply for the mortgages with various lenders in a short period of time – typically a two week time span. This way you know what your options are and can compare “apples to apples” so to speak as you try to figure out the best way to afford a second home.