Loans For. Second/Investment

Transcription

1 Loans For Second/Investment Properties

2 US Mortgage Corporation (NMLS ID#3901). Corporate Office is located at 201 Old Country Road, Suite 140, Melville, NY 11747; or (800) (LOANS15). Licensed Mortgage Banker-NYS Department of Financial Services- AK, AL, AR, CA, CO, CT, DC, DE, FL, GA, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MI, MN, MS, MT, NC, ND, NE, NH, NJ, NM, OH, OK, OR, PA, RI, SC, SD, TN, TX, VA, VT, WA, WI, WV, WY State Banking Departments/Regulators. Rates, fees and program guidelines are subject to change without notice. Certain restrictions may apply. Some loans arranged through third parties. First mortgages only. Not all products and/or programs are available in all states.

3 Table Of Contents Definitions of Second Home And Investment Property.... Page 01 Things To Keep In Mind... Page 03 Mortgage Or Loan On A Second Property... Page 05 Apply For A Mortgage For And Investment Property... Page 07

4 Definitions Of Second Home And Investment Property After financing and buying a primary property, you may have some monthly disposable income even after making monthly repayments on the mortgage. You have probably thought about financing another property that you may not be willing to live in 100% of the time. You may even want to use this second property as an investment so that you can generate another channel of income. However, lenders are tougher on second home and investment property mortgages and the definitions of a second home and investment property can be fuzzy. The property situation must be clear to the underwriter to avoid frauds. The definition of primary property is very straightforward it is the property in which the owner lives most of the year. 01

5 Investment Property Second Home A second home is also often classified as a vacation home. It must be at a certain distance from the primary residence and the minimum distance is considered to be 50 miles from the primary residence of the borrower. It is mandatory that the owner must live in or occupy this piece of property for a part of the year and it should also be fit for occupancy at any time of the year. The exact definition of a second home varies with each lender. Many lenders often insist that the second home be in a resort area (beach, desert, etc.) where a lot of vacation homes are available. The home can be a condominium, a boat or even a trailer it just needs to have sleeping, eating and bathroom facilities. An investment property is a piece of property that the owner or borrower does not stay in at all. Often times, a property that doesn t qualify as a second home because it is too close to the primary residence can be classified as an investment property. Sometimes, the underwriter can view the specifications of the property, which you want considered as a second home, and feel that it does not qualify as a second home and he/she may categorize it as an investment property. Banks essentially take a higher risk with investment properties, and as a result, the interest/mortgage rates are about 0.75% to 1.00% higher than with conventional loans. When parents consider helping a child by buying a house for him/her, this can be considered as an investment property if the child s house is too close to the primary residence of the parent and if the child is not a co-signer. The rules are different if the child is a college student and then the borrower can avail of owner occupied mortgage rate. It cannot be stressed enough, follow the second home and investment property definitions to a T. Lenders conduct post closing investigations and they take strict action against any violation. Remember - falsifying information in a loan or mortgage application is a federal crime. 02

6 Things To Keep In Mind Since the year 2010 and after the subprime crisis, lenders are being stricter and more diligent on second home and investment property financing. Most lenders specify that borrowers need to make larger down payments on all non-primary properties. There are several factors, facts, restrictions and requirements you need to know before applying for a mortgage on a nonprimary residence. 03

7 A homeowner can make a down payment of only 3.5% to 5% and get a 100% loan for a primary residence. However, for a second residence, borrowers must make down payments of at least 20% for a second home and 30% for an investment property. Lenders consider second home and investment property financing riskier than primary residence financing. This is because a homeowner will be more willing to make payments on the primary mortgage than the secondary ones during financial hardships. However, the procedure to obtain a mortgage for second home or rental properties is very similar to that of primary mortgages. Like primary mortgages, mortgages on second homes are of two types fixed and adjustable rate. As the names suggests, the interest rate is fixed in the former and varies according to market situations in the latter. There are combinations available of these two mortgage types. The loan terms range from ten to 40 years and if you can afford payments on short term loans then you should take short term loans as you will be paying much less in the long run. Before the credit meltdown, the maximum number of mortgages a person could take was eight. However, most lenders have now set the maximum limit to four mortgages per person. Interest rates are higher for investment properties and condos. Consequently, it is better to consider FHA (Federal Housing Administration) loans as the FHA allows non-occupying coborrowers unlike other conforming everyday loans. Most importantly, on a 15-year FHA loan, the mortgage insurance cost and rates are lower. The common misconception is that a property is considered a second home only if it is in another city or another county and a residence inside the city or county limits will be classified as an investment property. This is not true ideally the property must be miles away in a resort or vacation area. Benefits Considerations Yes, taking out a second mortgage can be a strain on your finances, but there are some benefits. On a second mortgage, just like on a primary mortgage the interest that you pay is tax deductible. The IRS (Internal Revenue Service) limits this amount but as of 2011, you are allowed to deduct interest on home equity loans (second mortgages) for up to $100,000 on both residences combined. You can deduct interest only on your primary and secondary residences, not the others. Instead of using the second residence as a vacation home, you may want to rent it out and convert it into an investment property to generate a steady source of income. Be careful when you do so. The IRS has varying regulations - you will not be eligible for a full mortgage deduction if you rent out the second home for more than two weeks in a year. Nevertheless, deductions on utilities and rental expenses can be taken. 04

8 Mortgage Or Loan On A Second Property You may need a second home for a variety of reasons. A second home could be for a family member, be used as a vacation home or rented out for investment purposes. Before you jump onto the bandwagon, you need to consider the risks and the benefits of taking out a mortgage on a second property even though you already have an existing primary mortgage. You must consider the current economic situation, your present financial situation, projected earnings, income and salary, future goals, etc. As mentioned before, second home or investment property financing is riskier so you need to follow these steps for taking out a second mortgage. 05

9 1. Determine the budget of the second home. Do not forget to include hazard insurance, association dues, and property taxes when calculating monthly payments. Then contact a lender and apply for a mortgage. 2. Get a pre-approval and not just a prequalification. A pre-qualification from a lender is just an opinion from the loan officer. During pre-approval, the lender will check to see if all monthly payments do not exceed 45% of your gross income per month. The loan amount and the minimum purchase prices on the new house is mentioned in the pre-approval. 3. Give this pre-approval letter to your real estate agent and ask him/her to find houses that are within the pre-approved budget. Decline any offer or negotiate offers to match the pre-approved amount. 4. Your lender and real estate agent should be in touch with each other. Make sure that they have each other s contact information so that the real estate agent can meet all the loan approval requirements. Then you can obtain a final approval of the loan or mortgage. Lenders often insist that the borrower has at least two to six months worth of payments towards the new loan in the bank. This could be in the form of stock funds, 401K funds, etc. You must be able to submit proofs of these savings. Also, you need to check the ownership history of the second property you wish to buy. Sometimes, agents increase the price of the property artificially by selling it many times within a 12 to 18 month time-period and if you are not careful, you could be paying way more than the market value of the property. 06

10 Apply For A Mortgage An Investment Property Getting a mortgage or loan on a second property is tough enough and getting one for an investment or rental property is even harder. Firstly, you must make sure that your second home is not unnecessarily listed as an investment property. Shop around and do your research and check the requirements of different lenders. Before you apply for a mortgage on an investment property, keep these tips in mind. 07

11 As with all other types of loans, you must have a good credit score. The lower the credit score the higher the mortgage or interest rates. Make sure your credit score is above 740. If your score is less than this, you will have to pay an additional fee to keep the interest rate the same or just agree to pay the higher interest rate. You must also have enough reserves in the bank to make payments for a few months. As mentioned earlier, the down payment on investment properties is much larger than primary or secondary residences. If you can afford a 25% down payment, most lenders will offer you better mortgage rates. If you do not have enough funds to pay the necessary down payment or if you do not meet other mortgage requirements, it is better to avoid taking loans from big banks and financial institutions. Smaller financing institutions offer more flexibility and you can get lower interest rates from them. Hiring a mortgage broker is also a good option as brokers have information about a large variety of loan products and can suggest the best one for you. Ask your friends and relatives to recommend you to their lenders as this can help build trust and this is important during loan approval. Ask for owner or seller financing as the credit crunch has made this practice more acceptable nowadays. Most property sellers want to get rid of their properties and they will be more than willing to give you loans on suitable down payments. You need to be able to assure them that you are capable of making timely monthly payments. Sometimes it pays off to consider some riskier sources of financing. If you know that your investment property has a high chance of making profits then you can consider financing a down payment or renovations through credit cards, life insurance policies, home equity, etc. You can finance the actual property via private loans and even peer-to-peer lending websites. However, you must be very careful and you have to do extensive research before-hand. 08

12 Corporate Office 201 Old Country Road, Suite 140 Melville, NY On US: 800-Loans