Second homes don't come cheap. Even if your vacation home is identical to your residence, lenders charge more for loans going to second homes. While the approval process is the same -- appraisal, title insurance, verifying your finances -- your lender may apply a higher standard in deciding whether to loan you the money.
When mortgage lenders write you a loan, they often count on the government-backed companies Freddie Mac and Fannie Mae to buy or guarantee the mortgage. After the 21st-century housing bubble burst, the two corporations decided they'd only invest in mortgages if the buyer had a credit rating of 660, up from 620. If you have poor credit, that makes buying a second home tougher, and some cautious lenders go even further: They want credit scores well above 700.
Before the crunch, Freddie Mac and Fannie Mae willingly backed second-home mortgages where the buyer had only a 10 percent down payment. Now they want you to put down at least 20 percent. Individual lenders sometimes insist on as much as 35 percent, depending on how big a risk they think you are. One way to raise the money is to take out a home equity loan, using the value of your primary residence as collateral. The drawback is that this piles even more debt on your shoulders.
Price of Investment
If you're buying the house as an investment, or you plan to rent it out when you're not vacationing there, expect to pay more interest and possibly a bigger down payment. Lenders assume you're less emotionally committed when you buy an investment, which results in more risk you'll walk away if money gets tight. Rental property also suffers more wear and tear than a personal home, which lowers the value. Charging a higher interest rate compensates for the risk.
Different lenders have different standards: If you can't reach a deal with one lender, the next in line may offer better terms. Even if you find an affordable mortgage, consider the financial demands before you sign anything. Research property taxes on the second home, and think about the costs of property management if you rent the home out. If you can afford a mortgage, that doesn't guarantee you can afford the house.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.