Best Tips for Getting a Mortgage on a Second Home in California
If you’re looking for a vacation home in California state to spend your holidays in, buying a second home can afford you with a plethora of opportunities.
But like your primary residence, buying a second home in cities like San Clemente, Huntington Beach, or Laguna Beach is an incredibly costly effort and one that requires a substantial investment of funds.
Getting a second mortgage is usually a requirement in order to help you fund this big purchase, but it can be a little bit trickier to secure another mortgage compared to getting your first.
If you’re wondering how to get a second mortgage in cities across the state of California, here are some tips to that may help.
What Classifies a House as a Second Home?
There are a couple of criteria that a property has to meet in order for it to be classified as a second home.
The first is that it can’t be used as an investment property to be rented out. Secondly, the home must be located a good distance away from your primary residence with a few exceptions. When an underwriter reviews the loan application the use of the property as a vacation/second home has to make sense.
Buying a home close to your job to stay at during the week in order to avoid a two hour commute makes sense. Buying a home that’s half the value of your current residence and a mile away is a tough seel and will likely trigger the property being classified as an investment property.
Apply for a Second Home Loan in California
Although you may be able to borrow against the equity in your primary residence in Irvine or Costa Mesa, you may be able to meet the lending guidelines for a conventional home loan on a second home alone.
You shouldn’t be too concerned with conforming loan limits in the area you want to buy because the interest rates on a second home don’t differ very much from a primary residence. However, it if were an investment or rental property, you’d notice a significant difference.
A minimum down payment of ten-percent is required when using a conventional loan to purchase a second home. When the desired loan is over California’s high-balance conforming limit, it’s considered a jumbo loan which usually requires at least 20-percent. Although, non-QM loans may allow just 10-percent down.
To improve your chances of obtaining a loan for a second home, think about the important factors that influence the terms you’ll get such as:
Your credit score – Having a good credit score will certainly be a benefit to getting approved for a mortgage with the best rates. Lenders typically want to see borrowers with credit scores at or above 740. If your score is lower, a larger down payment helps lower the risk the lender incurs.
If your credit score could use some improvement, put some effort into boosting it. Among the methods that work are:
• Always paying your debts on time each month
• Do not charge more than 20% to 30% of your available credit limit
• Pay more than the minimum payments on your credit cards
• Do not apply for any additional credit or loans
• Do not close old credit accounts, even if they’re are not being used
Your debt ratios – The underwriter will review your monthly debt-to-income ratio (DTI), which stands for the amount of your monthly income that is used to paying your debts. The lower your debt ratios, the better risk you are to the lender.
It is best to have some debt but not too much that it takes 45% of your monthly income. If you can, simply pay down your debts to keep your debt-to-income ratios low to show you’re a low risk borrower and subsequently should be approved for a second home mortgage.
Use a HELOC on Your Orange County Home
A HELOC – or a “home equity line of credit” – is an additional method to take advantage of the equity in your primary home. If you have enough equity accrued in your home, just apply for a line of credit and use the funds for a down payment on a second home.
Most of the time, you will be able to use about 85-90% of the equity amount of your primary home for a HELOC. However, the amount you’re approved to borrow against your home will depend on the lender’s guidelines which factor in your debt ratios, job, credit score, and the lender’s guidelines.
Similar to a credit card, a HELOC allows to access to a defined credit limit that you can borrow against. You have the flexibility to withdraw as much or as little as you like under the credit limit, the same as a credit card but at much lower rates. The rate is not fixed and is usually pegged to the prime index plus a margin of .50 to 3.
Think About a Cash-Out Refinance on Your Primary Residence
If you’ve owned your primary residence for 5-10 years, chances are pretty good that you’ve accumulated a considerable amount of equity during that time.
Applying for a cash-out refinance is very popular way to use your home’s equity. This is especially true when rates are low as borrower’s will refinance their first mortgage to access the built-up equity at attractive rates.
As an example, suppose your home is worth $675,000 and you still owe $350,000 on your mortgage. That means you would have $275,000 in equity (minus any closing costs and expenses).
If you want $150,000 in cash, you could refinance for $500,000 (the $350,000 existing balance, and the $150,000 they desire in cash proceeds).
In order to access that amount you would need to have:
• Good credit scores
• Qualifying income
• Acceptable debt-to-income ratio
For most second home buyers, using the equity they already have in their primary residence is the most cost-effective way to get a mortgage on a second home.
