Reader Question regarding Down Payments for Second Homes

mortgageporter-thinkingI received this comment from one of my readers on a post about occupancy and I thought it would make a good post all on it’s own.

What is the normal down payment on a second home? Our credit is in the “good” range and our debt to income is very good.

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Buying a Vacation Home in Washington

Washington State has so many great areas for folks to vacation in.  From the deserts in eastern Washington, rugged mountains, the Pacific coastline or the San Juan Islands; I think our state pretty much has it all to offer. It’s no wonder I’m seeing more clients taking advantage of lower home prices and interest rates to buy a second home. 

Mortgage rates are essentially the same for a second home as they would be for a primary residence.  Here are some requirements lenders have for financing an vacation (or second) home:

  • second home property is located a reasonable distance from the borrower’s primary residence. The rough guideline for “reasonable distance” is 50 miles or more.
  • suitable for year-round occupancy
  • borrower must occupy the property for some portion of the year
  • borrower must have exclusive control over the property
  • borrower must not enter into any rental agreements that require the property to be rented or give a management firm control over the property.  

If your second home does not meet the above guidelines, it may be treated as an investment property, which has higher mortgage rates and different guidelines. 

If you’ve been dreaming of owning a vacation home in Chelan, Walla Walla, Mount Baker or Hoods Canal, this could be a great opportunity!

If you would like me to provide a rate quote for a vacation home located anywhere in Washington state, click here.

Financing a “Kiddie Condo” for your College Student

A few weeks ago, I helped a Kent couple purchase a condominium located in Seattle for their daughter to live in while she attends college at Seattle University. They were prequalifed with their credit union, however the credit union was treating the transaction as if it were an investment property even though the couple (we’ll call them Mr. and Mrs. Kent) were not going to rent the property.

You see most lenders require that a home be located at least 50 miles away before it can qualify as a second home.  The city of Kent is just over 20 miles away from Seattle. Some lenders may even require that a second home meet conditions that one would consider a “vacation” property. It can really boil down to the underwriters interpretation of the actual scenario.  If a home does not qualify to be treated as a second home, then it’s likely to be considered an investment property which has higher interest rates, closing costs and tougher underwriting criteria.  

The Family Opportunity Mortgage is a special Fannie Mae/Freddie Mac program that we have available at Mortgage Master Service Corporation. It allows for this type of scenario to be treated as a second home as long as:

  • the property is a reasonable distance from the parent’s home
  • the parents may not own a second (or vacation) home near the subject property
  • the child is enrolled in a nearby college
  • the property may not be rented or used as an investment property
  • the child occupies the property for a minimum of one year

We were able to provide Mr. and Mrs. Kent with an “owner occupied” rate for the condo they purchased for their daughter where the credit union could only offer a non-owner occupied rate.

NOTE: Mortgage rates quoted below are from when I originally wrote this post on June 2, 2011 and are outdated. For current mortgage rate quotes for your home located in Washington, click here.

Here’s what the difference would look like based on today’s pricing for a condo* based on a sales price of $435,000 with an 80%* loan to value (down payment of $87,000) and 740 or higher mid-credit scores:

Family Opportunity Mortgage:

30 Year Fixed: 4.625% (apr 4.790).  Principal and interest payment (P&I) = $1789.

15 Year Fixed: 3.750% (apr 3.962).  P&I = $2531.

Non-Owner Occupied/Investment Property

30 Year Fixed:  5.125% (apr 5.311).  P&I = $1895.

15 Year Fixed: 4.250% (apr 4.489).  P&I = $2618.

*NOTE: Condo’s have a “hit to fee” of 0.75% with conventional pricing if the loan to value is over 75% or the mortgage term is over 15 years.  An additional 5% down also helps with pricing when you are financing an investment property.

Here is the same scenario as above except with 25% down payment ($108,750):

Family Opportunity Mortgage:

30 Year Fixed: 4.375% (apr 4.544).  Principal and interest payment (P&I) = $1738.

15 Year Fixed: 3.750% (apr 3.970).  P&I = $2373.

Non-Owner Occupied/Investment Property

30 Year Fixed:  4.750% (apr 4.900).  P&I = $1815.

15 Year Fixed: 4.125% (apr 4.426).  P&I = $2434.

Mortgage rates quoted are effective as of 8:00 a.m. June 2, 2011.  Rates can and do change often.  For your personal rate quote on a home located anywhere in Washington, please contact me.

Buying a Home with Owner Occupied Financing After Refinancing Your Home as Owner Occupied

I’m seeing a trend where home owners are refinancing their current home as “owner occupied” and then weeks after closing, try buying another home as “owner occupied”.  You cannot have two owner occupied homes.   It’s really that simple. 

I’ve had a couple of surprised people contact me who thought they could buy a home just following a refinance only to learn by their mortgage originator that they have to finance the new home as an investment property.   Financing an investment property not only offers a slightly higher interest rate than a mortgage for a primary residence, it also has tougher guidelines with higher down payment requirements and greater reserves (savings).  

If you are considering refinancing your primary residence and possibly buying another home, you should discuss this with your mortgage originator as soon as possible.  You will be signing a deed of trust which has language that you intend to occupy that home for 12 months.  Some folks might feel that the “intending to occupy” means that they can refinance as owner occupied and a couple months later buy “owner occupied” and odds are, they will be caught.  It may be purely unintended for this to happen, but be prepared for the possibility the new purchase to be treated as an investment property, even if you’re going to live there. 

If you’re considering taking advantage of the lower home prices and lower rates, you may want to delay your refinance of your current “primary residence” or talk to your mortgage originator about refinancing your current home as an investment property.  Your next purchase might qualify as a second home, however the property typically needs to be about 50 miles away from your primary residence (the one you just refinanced) and it is the underwriter’s call on whether or not the second home “makes sense”…this can be a real grey area.  

Life happens and we know plans change. Be upfront with your mortgage professional if you’re thinking about buying a home.  You may want to ask them to verify with your personal scenario with an underwriter.  Finding yourself in the middle of a transaction to buy your next home and having it declined as owner occupied can be an expensive experience.

Related post:

Is it a Primary Residence, Second Home or Investment Property

Can I Convert My Existing Home to an Investment Property to Buy My Next Home?

Is it a Primary Residence, a Second Home or Investment Property?

Every so often, someone will be interested in financing for a home they will not be living in 100% of the time…they want the best rate which is “owner occupied”.   It’s crucial to know the difference in your lenders eyes and to be completely upfront so you avoid committing fraud.  Bottom line, the property and situation needs to make sense to the underwriter.   Here are some basic definitions:

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Family Opportunity Mortgage…now at Mortgage Master Service Corporation

The Family Opportunity Mortgage helps families who are buying or refinancing homes for college students, elderly parents and disabled adult children.   Without this program, these transactions would often have to be considered as “investment properties” with higher interest rates and closing costs.   Now, it can be treated as a vacation or second-home mortgage.

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