Whether you want to purchase a luxury condo in your favorite city, a beachfront cottage, or a cabin in the mountains, buying a vacation property is a dream for many people. Unfortunately, this dream can also become a financial nightmare without proper planning and budgeting. Before you start the process of securing a mortgage to make this dream a reality, here are a few financial requirements you need to meet to purchase a second home.
Your total income needs to be high enough to cover your current expenses, which include your first mortgage/rent, utilities, credit card and loan payments, and basic living costs, plus the same expenses associated with the second home.
You may think your income is enough to cover two home mortgages, but it is important to remember other expenses. Your mortgage lender will want to see you have enough income to pay all of these bills plus homeowner's insurance, taxes, and maintenance costs for both properties.
For a low payment, you need a high credit score. However, credit scores need to be even higher when applying for a mortgage on a second home.
Most lenders require excellent credit before moving through the application process for a second home mortgage. If your credit score has decreased since securing your first home mortgage, it is not the right time to try to buy a second property.
No matter how high your credit score is or how much income you bring in each month, lenders will require a down payment to secure a mortgage on a second home. As a matter of fact, you should be prepared to put down between 10 and 20 percent when you are buying a second home.
The 10 or 20 percent down payment is a great deal higher than what you may have put down on your first mortgage, but lenders have different restrictions and guidelines to follow when you are applying for a mortgage on a second property.
Not only do you need to meet certain credit, income, and down payment guidelines when applying for a mortgage on a second home, but you also need to have assets, which are also known as reserves.
Basically, reserves are extra funds that can be used to pay your mortgage if you lose your job or experience a loss of income. In most cases, lenders require a few months of reserves before approving your mortgage on a second home.
Before you begin the process of searching for a second home and applying for a mortgage, you will need to have good credit, save up money for your down payment, and a few months of reserves.