How do I finance a second home loan?
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UPDATED: Sep 21, 2012
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There are several ways prospective borrowers can finance a second home loan. Borrowers can utilize Federal Housing Administration (FHA) loans, conventional mortgage loans, and cash payments in order to purchase a second home.
For many home buyers, an FHA-guaranteed second home loan may be the wisest option. The benefits to borrowing FHA loans include:
- Lower down payments
- Lower credit score requirements
- Easier qualifications
- No repayment penalties
However, FHA loans require buyers to treat their purchase as their primary residence. Many borrowers interested in taking out a second mortgage loan do so for investment purposes, and don’t wish to live in their second property. Additionally, FHA loans come with mortgage insurance premiums that are very similar to private mortgage insurance (PMI) requirements. That extra cost scares some potential borrowers away.
For those who don’t meet FHA requirements (or for those who aren’t interested in FHA-backed second home loans) a conventional loan may be the next best option. Some benefits of conventional mortgages include:
- No mortgage insurance requirements (if a down payment of 20 percent is made)
- Applicable to all property types
- Diverse loan program options (different terms and interest rate options)
- No maximum loan limit
Unfortunately, conventional loans typically require large down payments. Borrowers may also end up with higher interest rates or variable interest rates. Finally, applicant borrowers must have very good credit scores and a healthy debt-to-income ratio when applying.
A debt-to-income ratio is the amount of debt a borrower has compared to the amount of income they generate. This allows lenders to see if a borrower is carrying too much debt or, conversely, is able to take on more debt.
If the down payment poses a problem, borrowers may be able to use a home equity loan in order to finance a second home. By their existing home’s equity, borrowers can make the down payment on a second home loan. Unfortunately, most homes presently have reduced value due to the housing market collapse, so there isn’t a lot of equity to work with.
Finally, there is always the option of forgoing a second mortgage loan and instead simply dipping into cash savings for a new home. While not all borrowers have this option available, it is a viable method that may save money in the long term since interest rates would not accrue as they would on a second home loan.