For many American families, the American dream doesn't stop with the first home. But saving enough to turn the key to a vacation home is challenging: buyers need a large down payment and have to pass even more lending hurdles than when they bought their primary residence. With some planning, budgeting and perspective, a second home is attainable. Here's how.
Become a desirable borrower. Buyers need to impress lenders even more than when they're buying a primary residence.
- Save a lot of cash. In most cases, you'll have to make at least a 20% down payment --though lenders can ask for more. Among buyers who finance, the median down payment on a vacation home is now 32%.
- Pay down your debt. Lenders will look at your mortgages, car and student loans, and credit cards to make sure your debt including your future second home mortgage doesn't surpass 36% of your pretax income.
- Add it up before you bid:This SmartMoney calculator will show you how much second home you can afford; try this calculator to see if you have too much debt.
Build up a home cash reserve. Dual home or property owners have double the mortgages, property taxes and maintenance fees. To stay afloat, you'll need a vacation home emergency fund.
- Put cash aside. Think about a second home as a second life, with its own mishaps and surprises. In a savings or money market account, set aside enough money to cover two to six months of mortgage and property tax payments. That money will come in handy in case of a sudden job loss or unexpected repair work.
- Get insurance. Speak with your realtor or mortgage broker to find out if your home is in an area prone to natural disasters, like flooding or earthquakes, which aren't covered by basic homeowner insurance policies. If so, you'll need disaster insurance or even more in cash reserves.
- Calculate taxes and insurance: Figure out what you can expect on property taxes and disaster insurance.
Buy right. Some locations for second homes go through boom and bust cycles. Others constantly boom; while more remote locations simply follow mortgage rates.
- Get the right mortgage. To make monthly home payments more affordable, consider signing up for a 30-year mortgage, where payments on average are 20% to 30% smaller than a 15-year mortgage. If you have extra cash leftover each month, you could send more money to the loan.
- Buy at a discount. Fannie Mae's HomePath and Freddie Mac's HomeSteps list thousands of foreclosed homes that are selling at up to a $100,000 discount off similar homes in the area.
- Crunch the numbers: Determine what mortgage is the most affordable and manageable and whether you can afford the hidden costs that accompany most vacation homes.
What not to do. If you're considering any of the following, you could be setting yourself up for disaster.
- Don't overborrow. If a vacation home raises your total annual debt payments to more than 36% of your income, you could risk falling behind on mortgage payments and losing a home to foreclosure.
- Don't lie about your intentions. Lenders will ask if you plan to rent the home, and if so you'll have to make a larger down payment. Don't lie. If the lender finds out, you might be required to pay the entire mortgage on the spot.
- Don't take equity out of your primary home. Home values are volatile in many parts of the country. Try not to take cash out of your home to buy another one, or you could end up underwater on one or both.
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