Lenders realize that borrowers are more likely to default on mortgage payments on their second home loan. That’s the reason getting a second mortgage loan approved is always tricky and harder than the first one. But once the lender is convinced that you can afford an additional mortgage payment, the rest falls into place. There’s no reason to deny a mortgage to a borrower, especially if he has a clean payment history, a convincing credit score and a substantial down payment, to begin with.
Here are 5 things that can make or break your dream of getting a second home:
1. Credit Score – The credit score standards on second-home mortgages are set a bit higher than primary residence mortgages. An ideal credit score for second-home mortgages is 725 (or higher). But if your credit score is lower than that, getting the mortgage approved could be a hard nut to crack. Check with your loan agent if you can still get qualified.
2. Debt-to-Income ratio – When you apply for a second home loan, lenders don’t just look at your monthly payment but at the total payment you would make on all your current debts. Thus, they take into account the percentage of your existing debts on your income, also known as debt-to-income ratio. Unlike first time home buyers, second-home buyers need to have a fair debt-to-income ratio. The ideal DTI ratio is redlined at 35%.
3. Loan-to-Value Ratio – Most lenders cap the loan-to-value ratio to 75%. Smaller the loan-to-value ratio, higher the chances of recovering what the lender owes (in case the property has to be foreclosed). For borrowers, this directly translates into making a down payment of at least 20%. Higher loan-to-value ratio would also mean higher interest rates.
4. Employment History – When it comes to second-home mortgage, you need to prove your ability to handle both your mortgages and other debts, if any. For that, you’ll be required to show a stable, continuous source of income for a minimum of three years. An unstable work history might hurt your credibility with the lender.
5. Complete Documentation – You can speed up the entire process through complete documentation, be it the income, assets or credit card history. Getting your paperwork together puts the ball in your court, positioning you better to get the bargaining leverage. Any slackening on this part will eventually lead to a delay in the approval process.
A Word of Advice
While getting a second-home mortgage, be prepared for paying a higher interest rate, especially if it is secured against the same assets as the first. A smart way to save money on second-home mortgage rates is working out with a loan calculator. See what difference does it make on the interest rates with down payments of 20%, 25%, 30% or higher. If the difference is substantial, it makes sense to put down a higher down payment.
How to go about it?
Once you know you qualify for getting a second home mortgage, making a game plan on bagging the best mortgage deals gets easy as a pie!
Always keep your options open while applying for a second home mortgage. To select the best mortgage plan, make a thorough comparison between different lenders on the basis of interest rates, total fees paid and approval period. With online comparison portals, it has become easier than ever to find trust-able lenders and real estate agents. Asking your family and friends for the referrals also works well in getting the best deals on second-home mortgages.