Getting a Loan for Your Second Home - WCAX.COM Local Vermont News, Weather and Sports-

Getting a Loan for Your Second Home

Mortgage lenders make no bones about it: They are tougher on second-home loan applications than on primary-home loans. Why? Because the finances of a second-home buyer are, by definition, stretched thinner. The result is that second-home rates traditionally run one-quarter to one-half point higher than those for first residences. Ditto for origination points on vacation-home loans.

That said, however, the current environment for second-home lending is about as lenient as it has been in years. Banks are healthy again and a rebounding real estate market has them all rushing into the market at once. The result: heightened competition -- especially in the second-home arena. "The typical profile of a second-home owner is someone more affluent than a single-home buyer," says David Totaro, chief marketing officer for Dime Savings Bank of New York. "That's the type of person we want to do business with."

Using a Home-Equity Loan
With interest rates still at relatively low levels, many lenders will encourage you to take out a home-equity line of credit on your primary residence to fund all or part of your second-home purchase. Watch your step here. Most home-equity lines of credit float a point or two higher than the prime rate, so you could end up repaying this piece at a much higher interest rate than if you had simply taken a mortgage for the entire amount. Plus, unlike mortgage interest, which is deductible on up to $1 million of debt on your first and second homes combined, the home-equity cap is $100,000. (You get a break on $1.1 million total.)

Whatever you do, don't bank on starting with a home-equity loan and taking out a mortgage at a later date. A little-known IRS rule states that you have just 90 days from purchase to secure a mortgage against a principal or vacation residence, notes New York CPA Paul Kamke. Do it later and you can't deduct it at all.

Landlording and Mortgages
Lenders are still sticky when it comes to renting out your second home. Some lenders won't even write those kinds of loans; they have a hard time selling mortgages on investment property in the secondary market. If you find a lender that will, expect it to scrutinize you more carefully than if you were not a landlord.

At a minimum it will want to see proof that you're actually going to generate a decent cash flow. Often, the lender will ask for a cash flow statement for a property showing its rental history. In condo communities, management companies often provide them. If one isn't available, you'll need to get a second appraisal, comparing the rents and occupancy rates at similar homes. This will run an extra $300 to $600.

And don't count on your bank to take all of a home's estimated rental income into consideration. Even for a property with a long rental history, most lenders will only consider 75% to 80% of it. Some even take 75% after netting out your costs.

If you don't need the rental income to meet the mortgage industry's ratios, you may not want to mention to your lender that you're thinking of renting. We're not suggesting that you lie on your mortgage application. That's a federal offense. But if you happen to change your mind, well, that's another story. "A lot of people go in under the guise of buying vacation property for personal use only to turn around and rent it out," says Keith Gumbinger, of mortgage researcher HSH Associates. "I have never heard of people getting caught."

(Copyright 2001 SmartMoney.com. All Rights Reserved. This material may not be published, rewritten, or redistributed.)
  • Local NewsMore>>

  • Snowmobile season officially ends

    Snowmobile season officially ends

    Wednesday, April 16 2014 1:08 AM EDT2014-04-16 05:08:12 GMT
    Today marks the end of the snowmobile season. The Vermont Association of Snow Travelers reports a banner year with the best riding conditions in years. VAST says next year snowmobilers will be able toMore >>
    Today marks the end of the snowmobile season. The Vermont Association of Snow Travelers reports a banner year with the best riding conditions in years. VAST says next year snowmobilers will be able toMore >>
  • A big honor for a Burlington teen

    A big honor for a Burlington teen

    Wednesday, April 16 2014 1:06 AM EDT2014-04-16 05:06:26 GMT
    16-year-old Yusuf Abdi was named 2014 Vermont Boys & Girls Club Youth of the Year. He received the award during a celebration at the State House today. Judges called him extraordinary for his age, articulate,More >>
    16-year-old Yusuf Abdi was named 2014 Vermont Boys & Girls Club Youth of the Year. He received the award during a celebration at the State House today.More >>
  • Blood donor honored for his contributions

    Blood donor honored for his contributions

    Wednesday, April 16 2014 1:04 AM EDT2014-04-16 05:04:54 GMT
    There are your average blood donors who might give once or twice a year and then there is Frank Sklenarik. He's donated 140 units or 17-and-half gallons of blood since becoming a donor in 1996. Today theMore >>
    There are your average blood donors who might give once or twice a year and then there is Frank Sklenarik. He's donated 140 units or 17-and-half gallons of blood since becoming a donor in 1996. Today theMore >>
  • Weather rollercoaster wreaks havoc across the state

    Weather rollercoaster wreaks havoc across the state

    Wednesday, April 16 2014 12:07 AM EDT2014-04-16 04:07:42 GMT
    Rain, flooding and now snow. This weather rollercoaster is causing problems all around our region. Temps have dropped so the heavy rainfall has switched to snow. Rivers are spilling their banks, roadsMore >>
    Rain, flooding and now snow. This weather rollercoaster is causing problems all around our region. Temps have dropped so the heavy rainfall has switched to snow.More >>
  • Rutland mom caught stealing Easter goodies

    Rutland mom caught stealing Easter goodies

    Wednesday, April 16 2014 1:07 AM EDT2014-04-16 05:07:35 GMT
    A Rutland mom is busted for stealing goodies for her child's Easter basket.  22-year-old Monica Barker pleaded guilty to swiping about $70 in merchandise from Wal-mart. Police say most of the stolen itemsMore >>
    A Rutland mom is busted for stealing goodies for her child's Easter basket.  22-year-old Monica Barker pleaded guilty to swiping about $70 in merchandise from Wal-mart. Police say most of the stolen itemsMore >>
  • Warnings about rising rivers across our region

    Warnings about rising rivers across our region

    Tuesday, April 15 2014 8:08 PM EDT2014-04-16 00:08:37 GMT
    Flood warnings are in effect around our region as heavy rains begin to move through. There is already localized flooding at some of the typical problem spots, like the wrong-way bridge on Route 15 inMore >>
    Parts of our region are already flooding and others are bracing as heavy rains move through. Not only is rain falling fast, but warm temperatures Monday melted snow, adding to high waters.More >>
  • Man rescued from Black River in Springfield

    Man rescued from Black River in Springfield

    Tuesday, April 15 2014 7:06 PM EDT2014-04-15 23:06:00 GMT
    A man had to be pulled from the Black River in Springfield Tuesday morning. The Hartford Fire Department says it's working to pull a man out from the river. They say he got stuck about 75 feet out inMore >>
    Vermont emergency workers have rescued a man stranded in the middle of a treacherous section of river in downtown Springfield.
    More >>
  • NH agrees Vt. man was insane during killing

    NH agrees Vt. man was insane during killing

    Tuesday, April 15 2014 2:49 PM EDT2014-04-15 18:49:26 GMT
    A Vermont man charged with stabbing a stranger to death in the lobby of a New Hampshire hotel last year will plead not guilty by reason of insanity.More >>
    A Vermont man charged with stabbing a stranger to death in the lobby of a New Hampshire hotel last year will plead not guilty by reason of insanity.More >>
Powered by WorldNow
All content © Copyright 2000 - 2014 WorldNow and WCAX. All Rights Reserved. For more information on this site, please read our Privacy Policy and Terms of Service.