2nd Home Loans

The underwriting process for 2nd home loans is somewhat different than for traditional first mortgages. Especially in the current economic climate, lenders are scrutinizing loan applications closely before making an approval decision. Prospective buyers are well advised to educate themselves on the application process and to get their personal economic house in tip-top shape before they begin shopping for a second property. In the past several months, many people have found themselves unable to make mortgage payments and are either walking away from their homes or undergoing the emotionally wrenching pain of foreclosure. The majority of these homeowners had adjustable rate mortgages that started out at a low, affordable rate of interest. But as the rate adjusted upward, the monthly payment became an unaffordable burden. Economists can argue over the finer points of whether these homeowners should ever have been approved for mortgages. The sad reality is that many people who were approved for loans are now facing real heartache. Though it doesn't get as much attention, the second-home market is going through a similar upheaval. When people can't pay their 2nd home loans, they are even quicker to let the house go back to the bank than those who are defaulting on the mortgage for a primary residence. After all, the person who defaults on a second home mortgage still has his primary residence.

The silver lining in this cloud of mortgage woes is that a large inventory of houses is now on the market in many areas of the country. Even popular tourist destinations such as California and Florida have a tremendous number of houses for sell in some areas. It is truly a buyer's market and there are deals to be had for those who are willing to spend the time seeking them out and who already have financing in place. Prospective applicants for 2nd home loans should begin by preparing a personal financial statement that includes such information as income, expenses, and net worth. The applicant is well-advised to obtain a copy of her credit report and score from at least one, if not all three, of the major credit bureaus, Equifax, Experian, and TransUnion. The reports should be reviewed for accuracy and any errors need to be dealt with immediately. Lenders will be ordering these reports as part of the underwriting process and unresolved errors can delay approval. Knowing one's score is also helpful. The prospective buyer can research different mortgage products online and see if the credit score is high enough to qualify for more favorable interest rates and terms. If not, the individual may want to investigate positive steps that can be taken to improve the score before actually applying for 2nd home loans.

Once the prospective applicant has compiled and updated her financial information, she may want to search for a reputable lender. When it comes to 2nd home loans, the lender will want to know if the property will be used as a vacation home or as investment property. Financing for a vacation home will almost always have a more favorable interest rate than that for investment properties. In addition, the interest on a vacation home is often tax deductible. Mortgages for investment properties, for example, a house that the buyer intends to rent to others, will usually have a higher interest rate, the interest will probably not be tax deductible, and it will be more difficult to qualify for the loan. Lenders have a difficult time selling investment mortgages on the secondary market so they often prefer not to underwrite such loans in the first place. Some people may be tempted to lie on the application about the purposes for the second home so that they can get the lower interest rate. However, to lie on a mortgage application is a federal offense. Besides that, lying is just plain wrong. One of the psalmists writes: "Blessed is that man that maketh the LORD his trust, and respecteth not the proud, nor such as turn aside to lies" (Psalm 40:4).

As mentioned above, people who are facing financial difficulties are more likely to default on 2nd home loans than on their primary mortgages. Lenders are well aware of this economic reality which is why the qualifications for a second home mortgage are stricter than those for a primary residence. Not only will the interest rate be higher than for a primary mortgage, but the prospective buyers can expect that the origination fee will be at least one-fourth to one-half point higher on a mortgage loan for a vacation property than a primary residence. (A point is equal to one percent of the mortgage.) Not too long ago, homebuyers could purchase a primary residence with little or no money down. With the tightening of guidelines as a result of the current mortgage crisis, this is practically impossible anymore. Lenders who expect a down payment from their primary mortgage clients are definitely going to expect down payments from those applying for 2nd home loans. The prospective buyer may need a substantial amount of cash before buying a second property.

For those with the financial means to do so, the current housing market is a great time to find bargains. Prospective buyers can improve their chances of being approved for 2nd home loans by reviewing and updating personal financial information and being informed about the underwriting procedures. Excellent credit scores, a solid financial statement, and a good sized down payment will give the lender the needed confidence to approve the loan. And with that good news, the prospective buyer can become a bargain shopper. Let the search for that getaway vacation home or income-producing rental property begin!

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