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Procuring a mortgage with reasonable terms on a primary home is a tough job. The procedure is even more demanding for a second home. Lenders scrutinise the application for a mortgage on a second home in a more stringent fashion than that your application for your first mortgage would have received. You will need to satisfy several criteria before you can avail of a mortgage for the second property.
Lenders evaluate the credit report of a borrower applying for a loan for second home more closely than they would an application for a first mortgage. If your credit report lists a number of outstanding debts, lenders will be quick to reject the application. The credit score requirement is higher for a mortgage on a second home than for one on a primary home.
A mortgage lender requires a borrower to state the reason for purchasing a second home. Mortgage requisites for a property used for rental purposes are different from those for residential purposes. Most lenders are satisfied with a deposit of 25% for a second home used as a residential property. A property bought with a view to letting it out will generally call for a deposit as high as 40%. The interest rates for rental home mortgages are 1.5% higher than the normal. In addition, a lender normally requires the rental income is around 125% greater than the mortgage payments. You may have to conduct a property appraisal and provide a proof of rents of similar homes in that area.
A lender look will at the loan to value ratio before approving a mortgage package. For a primary residence, a lender may consider allowing a loan for financing a home. If a borrower has an exceptionally good credit score, a lender may grant a package with a loan to value ratio of as high as 95%. However, a second home calls normally for a loan to value ratio of 60% to 70%.
The underwriter processing your application will try to assess if you can afford the second home. They may look at the payment history of the mortgage for your current home and other debt-related payments. It is crucial to pay off all debts according to the agreed schedule for several months before buying a second home, as this will increase your credit score and standing with credit companies. In addition, the lender will consider your employment history, job stability and monthly income to ascertain that you could afford the monthly reimbursements.