Thinking of buying a vacation property or second home on the Outer Banks? Here’s a quick look at the most important information to know as you begin the process. While none of these are absolute hard and fast rules, here are some basic guidelines to create the easiest and best experience.
Securing the best rate requires:
- Credit scores of 740 or higher
- Non-Conforming loans allow a 43% debt to income ratio, 45% on Conforming (exceptions apply)
- Tangible assets are key (i.e.: checking, savings, 401K etc.)
Second Home MUST do’s for the best experience:
- 20% or more down payment
- Live at least 50 miles away
- Must have access at least 2 weeks of the year- no full-time tenants
- Use a local lender – Out of town lenders won’t know what to do with the Bill of Sale, Vacation Rental Addendum and might use an appraiser who isn’t as familiar with the area
- Don’t own another beach house in the area (some exceptions apply)
Investment Loan Quickies:
- If you need the rental income to qualify for the loan it becomes an investment loan
- Investment loans carry a higher rate, but the down payment can remain 20% (lower down payments carry higher rates)
- The income to qualify will be determined by an appraiser. An appraiser will do an analysis of the reasonable rental income available and you can use 75% of that amount
- Titling in an LLC will carry a higher interest rate
Best practices for any loan:
- Flood insurance has to be escrowed and the 1st year's payment is required at closing
- To waive escrows there is a .25% fee on loan amount due at closing
- If you are self-employed you will need to fully qualify through underwriting to be sure of the amount qualified for
- If you own multiple rental properties you will also need to be fully qualified upfront to be sure
- If you have declining income, the lender will take the worst of the last 2 years as the basis from which to work
- Don’t buy anything requiring financing once you start the lending process
Best sources for a down payment:
- Mutual funds/stocks
- Savings/Checking
- 401K Loan – not counted in your debt-to-income ratio
- Home Equity – will use full line payment for qualifying
- Gifted funds can sometimes work
Worst sources for a down payment:
- Any funds that are untraceable or unseasoned
- “Mattress Money”
- Business funds will require additional documentation from a CPA