Financing a second home now more expensive, but options remain

UUnfortunately for baby boomers, just in time to buy a second home, borrowing money to buy one has become more expensive.

Baby boomers (born between 1946 and 1964) make up a large portion of the population in the United States. The US Census Bureau reports that the population aged 65 and over increased by more than a third (34.2% or 13,787,044) in the past decade and by 3.2% (1,688,924) in 2018 to 2019. The fastest increase of all age groups. Although many are in their 60s and 60s, they have reached their cruising speed in terms of income and savings and want to own a second home.

As this population is considering buying a second home, there are considerations in addition to qualifying for the loan, assessing closing costs (2-3% of the loan amount) and the closing process. Second home buyers should make sure their budget can handle the additional monthly payments for mortgage principal and interest, property taxes, home insurance, HOA dues, routine maintenance, utility bills. utilities and possible major repairs.

Slow down the pipeline

But in terms of financing a second home, Freddie Mac and Fannie Mae have started to limit the number of second homes (and investment properties) they will provide mortgages for by capping the products lenders can sell them. . The reason given is the additional risk associated with second homes and investment properties.

And the fastest way to turn off the tap and slow the flow of any given product, whether it’s mortgages, perfume, or macadamia nuts, is to change the prices. Indeed, the pricing of second homes and investment properties, via loan price adjustments, has deteriorated significantly due to the actions of Freddie and Fannie.

Still, Freddie Mac and Fannie Mae aren’t the only game in town for lenders. But they represent the lion’s share of the market and, therefore, their effect on rates and markets. According to the Mortgage Bankers Association, recent figures show that 16% of applications for all types of home loans are from FHA, VA and USDA programs. The rest (84%) would be directed to Freddie and Fannie, along with a scattering of private label and wallet products. Lenders will tell you that second home loans are not made through FHA, VA, or USDA programs for a variety of reasons.

Financing a second home always different

Thus, the purchase price of a second home or an investment property has become more expensive due to the cap imposed on lenders across the country. Some lenders set the price at 2.250% (percentage of loan amount) or more for second homes. (As a reminder, 1% fee equals about 0.25% interest rate.) So an 80% loan to value (LTV) on a second home can now have an interest rate of around 0.500-0.625% higher. rate as a primary residence.

For many years, conventional vacation home loans required a larger down payment than a primary residence, a higher interest rate, and more stringent guidelines. Even before Freddie and Fannie moved, the minimum down payment for a vacation home was typically 20%, but many lenders have raised their minimum down payment requirement to 30% or 35% for a second home.

Due to the higher perceived risk with a vacation home (for example, if a borrower loses their job, making monthly payments on a second home will be less of a financial priority than their primary residence), borrowers must meet scoring standards. higher credit ratings, possibly a lower monthly debt-to-income ratio, full documentation of their income and assets, and high cash reserves.

And now, in addition to the above loan criteria, lenders are capped at selling this type of loan to Freddie or Fannie. Lenders, on the other hand, are resourceful and seek other outlets for this type of production. However, with this comes higher rates and potential additional costs for borrowers.

Regardless of the age or demographics of someone buying a second home, many industry analysts point out that a limit on second home or investment property financing will negatively impact borrowing costs and will have a wider impact on rental markets in the short and long term. (For example, you’ll pay more rent to stay in a vacation home on the beach or in the mountains.) And is that really what we want Fannie Mae and Freddie Mac to do?

Beyond this larger monetary policy question, the answer for most eligible consumers will be that financing a second home is doable – it will cost just a little more.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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