Conventional Loans for a Second Homes: Everything You Need

Learn about financing a vacation home. What is the down payment?

Second home condoThe Federal Housing Administration (FHA), Veteran's Administration, and the United States Department of Agriculture (USDA) do not provide second house financing; however, second home financing is available indirectly through the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

Mortgage requirements for a second house are somewhat greater than those for a primary residence. The increased guidelines are necessary since a borrower is more likely to default on a second property than on their first residence.

Typically, a property must meet the following criteria to qualify as a vacation or second home: 

  • must be occupied for at least a part of the year by the borrower
  • is limited to single-family homes
  • must be livable throughout the year
  • the borrower's exclusive control over the property is required.
  • Must be a primary residence and not a rental property or a timeshare arrangement
  • cannot be bound by any agreements that provide a management company authority over the property's occupancy.

The property must be sufficiently far from the borrower's primary residence to qualify as a second home. Lenders often consider a property to be a second home if it is located more than 50 miles from the main house.

Automated Mortgage Underwriting for Conventional Loans

Initially, the lender will submit your information into a software program for preliminary approval. This method of underwriting is known as automated underwriting. The software is offered by Fannie Mae and Freddie Mac to speed up the loan analysis. The software interfaces directly with Fannie Mae and Freddie Mac's computers.

The program makes recommendations to the lender regarding the application. For example, the software may require a larger down payment for low credit scores or require additional payment reserves. Because the evaluation is fluid, there are no hard and fast rules, just general guidelines.

Down Payment Requirements for a Second Home

Fannie Mae requires a minimum down payment of 10% for a second home; although the lender may require a larger down payment.

Reserves Requirements for a Conventional Loan

Applicants will likely need additional funds in reserve to make mortgage payments in the case of a temporary loss of income.

Individuals who are highly qualified will generally need at least two months of reserves, while those who are less qualified may require at least six months of reserves.

Private Mortgage Insurance on a Second Home

Fannie Mae and Freddie Mac require no less than a 20% down payment, however, many borrowers are unable or unwilling to meet the down payment criteria. Fortunately, or not, insurance companies will pay the lender the difference between the borrower's down payment and 20% stipulation. The borrower incurs a cost for the down payment coverage. There are several payment options for private mortgage insurance. The monthly payment option is the most popular. The expense is applied to the mortgage payment on a monthly basis.

Second Mortgage Loan Limits

The lending limit is set by the Federal Housing Finance Agency (FHFA). You can see the maximum loan amount with the U.S. Department of Housing and Urban Development (HUD) look up tool. The loan limitations vary by county.

Credit Score for Second Mortgage

The following credit score requirements are:

660 fixed rate with a 10% down payment
620 fixed rate with a 20% down payment

Closing Costs Paid by the Seller

It is prohibited for the seller to make a down payment on the borrower's behalf by Fannie Mae and Freddie Mac; but, Fannie Mae and Freddie Mac do permit the seller to pay a portion of the buyer's closing expenses.

The total amount of assistance provided is determined on the down payment by the borrower.

10% - 24.99% down payment - 6%
25% or more - 9%

Debt to Income Ratio for Second Home

Lenders use a simple ratio to compare the amount of monthly income to the total monthly debt paid monthly. Here's how the debt ratio is calculated. Let's say that the total debt paid each adds up to $1,000 (i.e., car payment, credit card, etc.) and the GROSS monthly income is $2,000. Divide the monthly debt by the monthly income. $1,000/$2,000 = 50%. The debt ratio for a second home mortgage is 45%, but, the automated underwriting system may allow a higher debt ratio.

Applying for a Second Home Loan

I used the terms Fannie Mae or Freddie Mac throughout this article; however, you cannot apply for a second mortgage loan through Fannie Mae or Freddie Mac.
Fannie Mae and Freddie Mac are large quasi-government corporations.
These two firms provide money to banks and large mortgage companies.
Following loan approval and closing, the lender often sells the mortgage to Fannie Mae or Freddie Mac. This allows the lender to continue lending money.

Naturally, the lender receives a commission on any sale to Fannie Mae or Freddie Mac.

If you're considering getting a second home mortgage, begin by contacting your bank.
Your bank almost certainly conducts business with Fannie Mae or Freddie Mac.

Conclusion

In conclusion, a conventional loan may be a good option for financing a second home. It is important to understand the requirements and restrictions associated with these loans in order to make an informed decision. By doing your research and consulting with a lender, you can determine if a conventional loan is the right choice for you.