If you dream of owning a home away from home, start your search by determining how much home you can afford. If you haven’t saved enough for a cash transaction, you’ll need a mortgage, and a banker can help determine what you can afford to pay. Call a loan officer for help in determining the amount of mortgage and type of mortgage for which you qualify. Qualification is based on several factors, including the amount of cash you have for a down payment, your debt-to-income ratio and your credit score.
Gone are the days when you could buy a second home for almost nothing down. Like Spanx, banks have tightened requirements, often asking for between 20 percent and 40 percent for a down payment on a second home. Interest rates may be higher if the home is closer to your primary residence. So you may have to do a bit of saving before you even start looking. Make sure you have enough money set aside for the down payment and closing costs.
Next, calculate your debt-to-income ratio: add your current monthly home payment, taxes and insurance, the projected payment of your second home and any other regular recurring debt such car payments, student loans, credit cards, and compare with your monthly gross income. Lenders will not generally give loans to those who have a debt-to-income ratio of more than 36 percent.
If you own your primary residence outright, you area ahead of the game.
Of course, before you shop, make sure your credit score is excellent. If it is not, spend a year paying bills on time and work out any discrepancies.
Do you plan to rent out your vacation property? The National Association of Realtors reports that only one in four vacation home buyers plan to rent out their properties for income or to cover expenses. But one in five investment home buyers plan to use their purchases for personal vacation use and or as a family retreat.
If this is to be an investment property, the Internal Revenue Service allows you to stay there only 14 days a year. If you rent a house out up to 14 days a year, which you can do tax-free and still qualify for mortgage deductions on your taxes, it’s a vacation home; if you rent it out and spend less than 14 days per year in it for personal use, it’s an investment property. Make sure you calculate the tax ramifications when considering what you want out of a property.
Still worried about affordability? Consider asking the owners whether they are interested in owner-financing, especially in this market. An owner who may be on the brink of foreclosure might work with a qualified buyer willing to put 10 to 15 percent down, if he will cash them out in five years.