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.

Are you occupying or not occupying? THAT is the question.

Lies

Telling a lender you’re going to occupy (live in) a property and then not doing so is a form of fraud.  I’m amazed at how people what steps people will take in order to shave a little bit off of their interest rate (NOO is roughly 0.5% higher in rate for a 20% down fixed conforming product).

Here are basic lender guidelines for what is considered "owner occupied":

  • You must live in the home for a majority of the year.   Typically, a borrower is agreeing to live in the property for a minimum of 12 months following obtaining a mortgage.
  • The home needs to be located within reasonable distance to your work.
  • The home should make sense with your family (is it large enough for your dependents).
  • You do not have a rental agreement on your "owner occupied" home.
  • You can only have one "primary residence".

Second or vacation homes have these guidelines:

  • Typically located in a "vacation" area and available for year round occupancy.
  • Should be approx. 50 miles away from current residence.
  • The property cannot have "time-share" interest and cannot be rented.
  • You can only have one financed "second home".

If your property does not meet the guidelines above, it may very well be considered an investment property (non-owner occupied) in the eyes of an underwriter.   Recently new guidelines became available that accommodate borrowers helping family members, such as The Family Opportunity Mortgage.

Many of the guidelines are up to underwriter discretion and plain old common sense.  If you are buying a home as "owner occupied", the lender is anticipating that you will live in the property. 

If you have other intentions, it’s important that you openly discuss them with your Mortgage Professional so that you don’t unintentionally commit lender fraud.

The FBI states on their press release from December 2005:

Mortgage Fraud is one of the fastest growing white collar crimes in the United States. Mortgage Fraud is defined as a material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan….The borrower makes a few misrepresentations, usually regarding income, personal debt, and property value, or there are down payment problems. The borrower wants the property and intends to repay the loan. Sometimes industry professionals are involved in coaching the borrower so that they qualify. Fraud for Property/Housing accounts for 20 percent of all fraud

When you’re obtaining a conforming mortgage, at application and again at closing, you sign affidavits stating that you intend to occupy (or not to occupy) the property that is being mortgaged.    It is much better for you to be upfront and ask your Mortgage Professional if your situation meets the guidelines of an owner occupied property than to have the lender call your Note due, or worse…how about a little jail time?