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Mortgage Tips for Snowbirds

Flying South

Snowbird mortgage rules are the same for anyone looking to finance a vacation home, unless the borrower resides outside the U.S. In the latter case, there are more onerous foreign national mortgage regulations, a higher interest rate would apply, and there are several title, estate planning, legal and tax issues which would need to be carefully considered. Given today’s exchange rate [CAD$1.00 = US$0.76], Canadians would do well to obtain a mortgage from a U.S. lender – preferably one affiliated with their Canadian bank (for relationship, credit history and funds transfer purposes).  

But here are a few thoughts for those who are able to qualify for a conventional mortgage for the purchase of a property in the sunny South:

  1. Whether a condo or single-family home, call it a second or vacation home – not an investment property (rent it later, if necessary) - you can borrow up to 90% of value (vs 85% for a rental) and avoid a risk adjustment charge of 2.125% to 4.125% of the loan amount, depending on your credit score.
  2. Get your credit score to 740. Otherwise, depending on your down payment, another 1.125% to 3.250% risk charge could apply.
  3. Get a reliable pre-qualification letter. You don’t want to find out just before closing that your debt-to-income ratio (including mortgage obligations of all properties owned) exceeds the maximum lender threshold.
  4. Understand the costs, and then budget accordingly. There will likely be unexpected repairs, improvements, HOA/property management fees, travel costs, etc.


Here’s the Point: Snowbirds could save a bundle of money by doing a little homework before financing a Florida home purchase.

Just Retired and Can’t Get A Mortgage

retired mortgage


The plane tickets are booked for golfing and walking on a Florida beach for three months. Upon settling into retirement, you realize how nice it would be to own a home in your favorite vacation spot. With family back home, the perfect scenario would be to keep your primary residence – and buy a vacation property.

But do you really want to spend a good chunk of your retirement savings by paying cash for your Florida home? Most people would rather finance their vacation home – to save their funds and capitalize on low interest rates.

However, getting pre-qualified for a mortgage may be problematic if you do not have a monthly pension. You need to show the lender sufficient ongoing annual income to prove you can continue to make monthly mortgage payments.

There are two programs available that allow you to create an earnings stream without having to spend all your retirement funds:

  1. Structured Annuity: Establish a monthly draw from your 401k or IRA funds, and show you are able to continue this income stream for 36 months;
  2. Assets-For-Income: Create a hypothetical income stream without liquidating your brokerage account (equal to 70% of your assets divided by the number of months in your loan);

If you aren’t worried because you expect to continue earning commissions from your prior business while retired, be careful because you may be deemed a Self-Employed borrower after retiring from your W-2 job (conventional lenders require two years of tax returns from Self-Employed borrowers).

Here’s the Point: You can retire without a stable income stream and still qualify for a mortgage.

Really Bob? Are You Sure About That?!

Oh, really?I’m buying another property, but I plan to call it a second home so that I can get a better interest rate.

No You’re Not: Unless it has vacation/resort amenities and is 50+ miles away from your primary residence, it will be treated as an investment property and carry a higher interest rate].

  • WHY? Because it’s not your vacation home

Oh, really?I have an FHA loan on my home, and I’m going to use FHA again to minimize the down payment on my second property.

No Sir: You can only have one FHA loan at a time and it must be on your primary residence (and besides, there are conventional financing programs that offer loans as high as 97% of value).

  • WHY? Because FHA financing is meant to help consumers purchase their home

Oh, really?Unless I’ve had 24 months of self-employed earnings, I’ll never get a residential loan.

Not True: Depending on your ability-to-repay, Freddie Mac may only require one year of tax returns from your new business.

  • WHY? Because Freddie takes compensating factors into consideration

Oh, really?I’ll still profit by selling one of my properties to my son – and he can get maximum FHA financing because I will co-sign and it will be his primary residence.

Incorrect Again: A parent/child profit-sharing relationship is deemed an “identity of interest” transaction, and the buyer is restricted to 75% loan-to-value when there is a non-occupying co-borrower.

  • WHY? Because the borrower should solely benefit from primary home ownership

 

Here’s the Point: The number of rules imposed by Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) can be daunting – but most of the time they actually make sense.