The Latest on Second Home Financing

With rock-bottom interest rates and attractively low home prices, it’s safe to conclude that now is a great time to buy a second home. However, there have been some changes in the last two years that could impact your chances of getting financing. Here’s what the experts say:

    ? Generally speaking, financing is readily available for owner-occupied, single-family homes. But the interest rate may be higher for a second home than for a primary-home mortgage, and the down payment will probably be larger, 20 to 25 percent instead of the 3.5 to 20 percent commonly needed for a primary-home mortgage.

    ? Be prepared to supply more information about your income and assets, and to have your credit history more closely scrutinized. If you’re self-employed, you’ll need to produce tax returns that prove you have enough income to make the mortgage payments over time. Also, be aware that Fannie Mae currently requires a minimum credit score of 620 for second-home mortgages with at least a 25 percent down payment. If you’re putting down less than 25 percent, you’ll need a minimum credit score of 680. You’ll get the best terms if your score is 720 or better.

    ? As with any home purchase, you should work with an experienced mortgage professional who is knowledgeable about new regulations and restrictions. Ask family members and friends for recommendations, and even check out candidates’ profiles on LinkedIn.com. Another good place to start is to ask a realtor in the locale where you plan to purchase. Realtors with the Resort and Second-Home Property Specialist (RSPS) certification have an extra layer of knowledge about the marketplace.

     ? If you take out a home equity loan or line of credit on your primary home to finance the purchase of a second home, you could lose money on taxes. Borrowers cannot put a mortgage lien on their primary home and deduct the interest as acquisition indebtedness for their second home. If you use a cash-out refinance or home equity loan and are subject to the Alternative Minimum Tax (AMT), the interest is not deductible at all. If you’re not subject to the AMT, only the interest up to $100,000 is deductible as “home equity indebtedness.”
  
 ? Don’t make large credit card purchases or do anything else to hurt your credit score while the loan is still being processed. This may seem like a no-brainer, but today’s lenders re-pull credit reports a few days before closing and may deny funding if your balances are larger than when you first applied. It’s more important than ever to resist the urge to pull out that plastic.

– Susan Bady