We were asked recently “Do you have any decent programs for second home buyers?” and the quick answer is “Yes, there are a lot of creative ways to finance the purchase of a second home”. These financing options include purchase loans on the second home itself, refinancing a primary or other residence to pay cash on the new home, or both.
6 Successful Mortgage Options to Purchase a Second Home so You Don’t Have to Pay Cash
- 10% Down Payment on single family home, townhome
- 20% Down Payment on condos
- Veterans – Cash Out up to 100% of appraised value on primary residence
- Conventional mortgage cash out up to 80% of value on primary
- Reverse Mortgage cash out on primary residence
- Combination Reverse Mortgage cash out on primary + conventional loan on 2nd home
10% Down Payment on Purchase of 2nd home:
When purchasing a 2nd or vacation home which is a single family home or a townhome, we have the ability to lend up to 90% of the purchase price. Because the loan is over 80%, there would be PMI required and we have several PMI options to best fit a buyer’s scenario and goals. Down payment can come from many sources including checking/savings, retirement account withdrawals or loans, home equity loans or line of credit, or the sale of an asset such as a car or investments.
20% Down Payment on Condos:
Currently there are not any PMI companies that will insure a 2nd home condo which is why the 20% down is required. In order to finance a condo purchase, the condo must be approved by meeting certain industry standards. So we would request items such as a completed condo questionnaire, declarations and bylaws, proof of all insurances, and a copy of the current budget of the association. As you will see further down in this article, there are several options to obtain the down payment rather than out of a savings account.
VA cash out refinance loan on primary residence:
A little known option through VA is to be able to refinance up to 100% of the appraised value of the home and the funds may be used to pay off the existing mortgage, consolidate debts, or receive cash out for many reasons including use towards buying another home. The cash out from the VA refinance could either be used to fully purchase the second home in cash with no loan needed on the new home or get enough cash out for the down payment on the new home while getting a conventional first mortgage for the rest.
Conventional cash out refinance loan on primary residence or investment property:
Fannie Mae and Freddie Mac conventional loans will allow up to 80% of the appraised value on a primary residence or 75% on an investment property. The cash received from this refinance could be used towards the down payment on the 2nd home or if there is enough equity available, the cash could be used to fully purchase the 2nd home.
Reverse Mortgage cash out refinance on primary residence:
A Reverse Mortgage could be used as a refinance on the primary residence to obtain the funds to purchase a second home. If enough is able to be withdrawn to pay cash for the 2nd home, then the borrower will not have a mortgage payment on either property since the 2nd home was paid for in cash and the Reverse Mortgage on the primary requires no payment **. This allows seniors to live comfortably in their primary residence and vacation in their second residence without stretching their budget. Learn more about Reverse Mortgages
Combination Reverse Mortgage cash out on primary + conventional loan on 2nd home:
Another idea for using a Reverse Mortgage is combining it with another mortgage on the 2nd home. When receiving cash out on a Reverse Mortgage, there are limitations on how much can be obtained at closing. So if the cash out amount is not sufficient to fully purchase the second home, then we could close a Reverse Mortgage for a down payment and then use a conventional mortgage to cover the difference. The end result is the seniors have two homes yet only have one mortgage payment since a Reverse Mortgage doesn’t require a payment. **
** Borrowers must continue to keep the property in good repair, pay taxes and insurance, and occupy the home as a primary residence
Advantages for using a mortgage on a primary residence to purchase a second home include:
- Using a refinance on a primary residence can especially be a good idea when the property being purchased isn’t in great condition which could cause an issue with a mortgage against that property. Learn more about appraisal requirements.
- Enough cash could be potentially obtained to cover the purchase of the new home plus funds for renovations if needed
- If a borrower starts early enough, he/she could be considered a cash buyer on the new home which could provide advantages in negotiating with the seller because the home could be purchased with no contingencies and much quicker
- When purchasing a unique property, it could be difficult to obtain financing such as non-warrantable condos, condotels, manufactured homes, geo or dome homes, or others.
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Author: Russell Smith
Team Move OVM Financial loan officer success is Russell’s primary focus. He provides the tools and techniques he used as a top producing loan officer. Additionally he offers the Team Move OVM Financial Agent Training Program. Sharing is so important to Russell so he works diligently to be a resource to loan originators and Realtors.