About Mortgages, Particularly for Second Home Buyers
Financing your second home is a little different than financing your primary home. Here is some general information on second home financing as well as information very specific to Sullivan County to help you successfully finance your purchase here.
What are the differences between financing a primary and a second home?
Ratios and down payment amount. Lenders determine how much they're willing to lend you based on a ratio of your housing expenses to your total income. Typically that number ranges from 28 to 35%. Housing expenses include your mortgage payment, taxes, insurance, and in the case of a condominium or private community, any homeowners dues. (Housing expense, for their calculations, does not include utilities.) For a second home mortgage, the lender includes the housing expenses for your primary residence together with the projected expenses for your second home to calculate your ratios. Whether you rent or own your primary residence, if your monthly expense on your primary home is, say, $2,000, and your housing expense for your second home is $2,000, to a lender your total monthly home expense is $4,000. If the lender requires that your total housing expense be no more than 32% of your gross income, you would need a monthly income of $12,500 ($4,000 / .32) to qualify for a mortgage on your second home if the total expense (what's called PITI, or Principal, Interest, Taxes and Insurance) for that home is $2,000 per month. Its not really that complicated when you get the hang of it. But online mortgage calculators and sites that provide mortgage preapprovals, like e-loan, generally do not have the capability to take primary home expenses into account when calculating affordability of a second home. The only way you're going to get an accurate calculation and preapproval is by talking to a mortgage lender.
The second big difference is the down payment required. During the go-go years of the real estate market, lenders would do low down payment loans for both primary and second homes. Today, though, they've tightened up criteria for second home mortgages. Buyers today generally need a minimum of 20% down for a second home purchase. You may find a lender willing to go with a 10% down payment with PMI (private mortgage insurance), but you'll have to shop.
Can I use my bank in the city for a mortgage, or one of the "online" lenders?
I strongly recommend against it! Lending on country property is different than lending on city or suburban property. Particularly in Sullivan County, where we have so few sales in any given year, it can be difficult finding "comps" (similar houses that have sold recently) within an acceptable distance for a "city" underwriter. The big lenders typically want everything to fit into a nice box, with very little flexibility
The big lenders now have much tighter underwriting criteria that may work in dense suburbs, but don't work here. Many now want all of the appraisal comps for a house to be within the same school district or same township. We have a number of very small school districts and townships, and it can be impossible to find all comps for a house within a single school district or township, particularly for lakefront or larger acreage properties. Compounding the problem is that they often impose a very narrow comp time window. For a conventional mortgage, they may allow 2 of the 3 comps to go back 6 months, but may want the primary comp to be within 60 days. And if PMI is involved for a mortgage with a down payment of less than 20%, the PMI underwriter may require all comps to be within 90 days.
Large lenders have also shifted ordering appraisals directly from local appraisers to using regional and national appraisal management companies (AMC's.) The actual appraiser the AMC places the appraiser with may, or may not, have much local knowledge or access to local comp data. And the icing on this frustrating big lender cake? Your loan package and the property appraisal will likely be reviewed by an underwriter in a distant processing center who doesn't know Sullivan County from Sun Valley, much less understand the value difference between, say, Mohican Lake and Wolf Lake. (Anyone who knows the local market understands there is a big difference between those two.)
Bottom line? I strongly recommend you get your mortgage through a local bank, that has loan processors and underwriters with local knowledge.
How do I find a local mortgage lender?
I provide my clients with a list of mortgage lenders I recommend. Note that in New York it is illegal for real estate brokers to receive kick backs or referral fees, so anyone I recommend is someone who I think is good, and not because they are paying me to say they're good.
Are mortgage rates higher for a second home?
Generally no. Particularly if you're putting 20% or more down, you shouldn't be much of a spread. Mortgage rates are based on risk, and if you have a substantial down payment and your credit is very good, there shouldn't be any difference. However, if your credit is marginal, the risk to a lender is greater on a second versus primary home, and you may see a small difference.
Is mortgage interest deductible on a second home?
Generally yes, although you need to speak with your tax advisor to confirm this, as IRS rules do change. As of early 2010, the IRS permits a mortgage interest deduction for one primary and one second home. However, there are maximums and limitations (which generally only impact purchasers of more expensive properties.) Note: the mortgage interest deduction only applies to residences; if you take out a loan to purchase raw land, without a habitable structure on it, you cannot deduct the mortgage interest!
What about my rate lock?
Mortgage lenders offer various rate lock periods, guaranteeing your mortgage rate for 30, 45, or 60 days. In the city or suburbs, a sale can typically close in 30 to 45 days. In Sullivan County, the closing process typically takes longer for a number of reasons. The quickest I see a closing involving a mortgage is about 45 days from an offer acceptance, and 60 to 90 days is more common. If a house is a 'short sale' (requiring approval from the seller's lender to accept less than the amount due on the seller's mortgage to clear the mortgage lien), it can take from 3 to as much as 6 months!
Given the long closing period here, be cautious about locking a rate soon after getting an acceptance of your offer. It is unlikely that the sale will close within a 30 or 45 day rate lock, and it's taking a chance with a 60 day lock. You may want to wait until you have fully executed contracts to finalize your mortgage application and lock your rate. However, if rates are moving up, you may want to 'lock' and then pay a rate lock extension fee at the other end. This is something to discuss with the lender.
What about FHA loans or mortgage programs for first time home buyers?
FHA loans can be a great option, partucularly if you have a down payment of 10% or less. They also permit you to roll some closing costs into the loan. However, FHA loans are only applicable to an owner occupied single family home used as your primary residence. Even if the home you're purchasing is the only home you will own, if you rent in the city and spend the majority of your time there, the home you're purchasing is not your primary residence. Your apartment in the city is. The ins and outs of designating a primary residence is beyond the scope of this site and is something you should discuss with your tax advisor.
Likewise, there are special mortgage programs in New York state, particularly for first time home buyers, through SONYMA, the State of New York Mortgage Agency. These are also limited to primary, owner occupied residences, and some income limits do apply. More information can be found on my First Time Homebuyers page.