When it comes to purchasing a second home to be used as a vacation or investment property, the new Qualified Mortgage requirements haven’t had much of an impact on the overall process.
Aside from the more specific requirements on qualification guidelines, the elimination of specific mortgage products like interest-only mortgages, and additional requirements around documentation, for many lenders, the new QM rules have had little impact or change in the overall second home mortgage process.
The main qualifications that a lender will review in order to make their lending decision still remain to be the estimation of your debt-to-income ratio.
This calculation is created by taking your existing debt payments including any primary residence mortgage, adding in the projected mortgage payment for your second home and then calculating what percentage that represents of your total pretax income.
The mortgage payment included in this calculation is a total of the monthly principal, interest, taxes, insurance, and any homeowners association dues, called the “PITIA” payment in mortgage lingo.
With regard to the total pretax income, remember that there are underwriting guidelines on what income (and how long you must have earned this income) can be considered for qualifying, particularly when you are self-employed or earn a majority of your income from commission.
Under QM regulations, the debt-to-income ratio needs to be no more than 43% of your monthly pretax income.
How to lower your DTI
If your current DTI ratio is greater than 43%, consider options that can help to lower your number before you apply for your second home mortgage. Paying down or paying off credit cards and other monthly obligations is the best way to decrease your ratio.
You may also want to look at increasing the amount you plan on putting down for your second home. Increasing your down payment could lower the projected monthly mortgage payment and positively impact your DTI ratio.
Lastly, you might consider purchasing a less expensive property to reduce the monthly mortgage payment’s effect on your DTI ratio.
Your loan officer can assist you with the analysis for each of these DTI ratio reduction strategies to determine which approach might best fit your financing goals.
Lender requirements to categorize the property as a second home
When considering the purchase of your second or vacation home, be sure to understand the mortgage lender’s eligibility requirements for categorizing the property as a second home.
These requirements typically focus on six key questions:
1. Is the property located a reasonable distance away from your primary residence?
2. Is the property occupied by you for some portion of the year?
3. Is the property a one-unit dwelling?
4. Is the property suitable for year-round occupancy?
5. Will the property be rented on a timeshare arrangement?
6. Is the property subject to any agreements that give a management entity control over the occupancy of the property?
Your mortgage lender will consider your answers to these questions to ensure your property can qualify as second home.