Second / Investment Home
If you are considering getting a second home mortgage or investment property mortgage, you should know that it’s going to be more difficult in this economic environment.
But while home prices are low, the days of quick-and-easy financing are over, and the tightened credit market can make it tough to secure loans for second mortgages and investment properties. However, with some preparation, you can bring these loans within reach.
A second home mortgage is going to cost between a quarter and a half point higher in interest than that for your first residence. That’s true of origination points, as well.
That is, if you’ve got a good credit rating, and your finances are in order such that you are realistically in the market for a second home mortgage, you’ll probably be able to get one. If you’re ready to seek out financing for your residential investment property, these tips may improve your chances of success.
Have a Substantial Down Payment
Mortgage insurance will not cover investment properties, so you will need a down payments of at least 20 percent to secure traditional financing for them. The higher percentage down-payment you can amass, the better the interest rate you are most likely to obtain.
It’s going to be especially easy for you if you’re really in good financial shape, because there’s a lot more competition in the second home mortgage industry today.
If you don’t have the down payment, obtaining a second mortgage will be much more difficult.
Have a Strong Borrowing Profile
Although there are many factors — among them the loan-to-value ratio and the policies of your lender — can influence the terms of a loan on an investment property, investors should check their credit score before attempting to secure a property.
If your credit score is below 740, it will cost you additional money for the same interest rate. That is you will have to pay a fee (or points) to keep the same interest rate.
The alternative to paying points if you score is below 740, of course, is to pay a higher interest rate.
In addition, having reserves in the bank to pay for all your expenses, personal and investment-related, for at least six to eight months will also factor into your loan. This way, if you have a vacancy in your rental property, you have a cushion.
Consider Smaller Banks
If your down payment isn’t quite as large as it should be or if you have other extenuating circumstances, consider going to a mortgage bank, such as Financial Equities) or neighborhood bank for financing rather than large, national financial institutions.
Local banks have more flexibility in the way that they know the local market conditions and have more of an interest in making local investments.
Mortgage banks are a great option because they have access to a wide range of loan products to suit your needs.
Also, recommendations from friends are a good way to find lenders. Potential investors shouldn’t be afraid to inquire about lender credentials, and then verify them thoroughly
Gather Your Documentation
As with buying your first home, you will need to prove that you can afford to buy a second home. That is, you’ll have to show that you can manage two mortgage payments.
One example is to refinance your first mortgage so that instead of it being a 15-year mortgage, you can refinance it to a 30 year mortgage so that you have lower mortgage payments on a monthly basis; if you can lower the interest rate on that mortgage, as well, you’ll free up even more money.
Be prepared to provide copies of: two month’s worth of your bank statements, investment account, and retirement account statements (all originals and not internet print-outs); your last two pay stubs if you have a job; driver’s license and Social Security card; and bankruptcy, divorce or separation papers, if applicable.
If you are self-employed, you may be asked for some or all of the following: business license or occupational license, letter from your CPA establishing two years’ self-employment, last two year’s tax returns, business bank statements, and/or business financial statements..