Home ownership may seem like a world away for the average consumer. With listing prices on the rise in many markets, getting your finances in order is required way before your search. When the moment finally arises, and you gain the keys to your first home, it will be an occasion worth celebrating.
If you are successful with keeping up with payments, you may be wondering about how to expand. A vacation home in a suburban neighbourhood, for instance, may be in the cards. Financing this second home is indeed possible, but you’ll need to know about how to finance the endeavour.
In order to finance a second house, keep these following tips in mind.
1. Credit Rating
For starters, you’ll want to be able to have your financial affairs in order. If you are able to keep up with your monthly payments on your original home, you should be in good shape. That is because consistent blemishes on your credit rating can lower your chances of financing overall.
Your credit rating is one of the most important pieces of information that is reviewed by a lender. In order to meet the requirements of owning a second home, you need to be considered safe as a borrower. Ensure that your payments are made on time, to keep the rating in good shape!
2. Debt-to-Income Ratio
Another key aspect of getting the right financing for a second home is predicated on how strong this ratio is. Your debt-to-income ratio is a key indicator of how secure you will be as a potential homeowner. The current debts you have must be at a low enough level, along with your income being at a steady rate.
When it comes to the home ownership process, particularly for a second property, lenders are wary of this ratio. For the most part, they want to see that significant cash reserves are present in order to mitigate attached risk. Since you will be handling payments on two homes, you need to be in good standing!
3. Lender Requirements
Before the right financing options can be discovered, you’ll have to meet certain pieces of criteria. Although every lender will be different in some capacity, there are some factors that are common for all. For example, before you seek out a second home, you must have lived in your home for at least a portion of the year.
If you are planning to use your second home for rental purposes, other aspects have to be considered. Some lenders may prohibit the use of the second home to be under control of a property management company. Try to be as familiar as you can with their rules, in order to streamline the process.
4. Home Equity Line of Credit
The next step is to gain the right financing for a second home. Although there are more than a few options available, experts generally recommend going the way of a loan. One of the best loans to take out is the home equity line of credit.
This type of loan, otherwise known as a HELOC, is based on the equity stored in your first home. You can take out cash against this equity in order to finance your second home pursuits. One of the best aspects of a HELOC is that you can borrow as much, or as little, as you need. Take this into account when searching for financing.
If you are still unsure about going the way of a second mortgage, such as the aforementioned HELOC, consider refinancing. Many homeowners who are seeking out a second property often go the way of a cash-out refinance. In essence, this occurs when the original mortgage is replaced.
A larger, newer mortgage takes its place and acts as a means to access cash. The amount of cash you access here is based on the equity stored in your home, similar to a HELOC. However, what differentiates the two further is that a cash-out refinance may allow you to borrow more money in some cases.
6. Added Costs
Eventually, things will fall into motion as the home search comes to an end. However, financing still has to be considered for a plethora of secondary added costs too. You’ll have to consider home insurance, for example, and what companies are best suited for the home’s location. In some cases, you may be able to combine your primary home’s insurance with this one too.
A second home can be incredibly worthwhile, especially if you have the time and resources to move into one. With respect to financing, however, you’ll have to make sure you keep as many doors open as possible. Keep your finances in good order, and you will be on your way to becoming a new homeowner.