Vacation, second home, investment loans get squeezed

by Broderick Perkins

(9/5/20112) If you think it's tough obtaining a home loan for your primary home, wait until you try to cash in on record-low interest rates to buy a second home.

Whether it's a retirement home, vacation home or long-term rental property, low home prices and record-low interest rates are certainly attractive, but you've got to pass muster with tight-fisted lenders to cash in on those low rates.

It's not just that lenders are tight-fisted because they want to be. They've endured the risk that came with the Great Recession and they don't want exposure to additional risk.

And after that first home, the second, and any beyond, get riskier.

Lenders are aware that if you have two homes and one is for play and one is for real, if times get tough, you are going to keep paying the mortgage on the real deal and let the playhouse go first.

That's especially true if its an investment property. CoreLogic reported the foreclosure rates on investment properties were 1.5 times greater than second homes used as playhouses rather than as investments.

Tough lending requirements are why investors come to market with all cash whenever they can.

Higher purchasing costs

To offset their risk, lenders aren't going to give you their lowest interest rate, even if you have excellent credit. Expect to pay at least a quarter to a full percentage point more for an investment, vacation rental or second home property. Perhaps even more.

You'll also have to have lower loan-to-value ratios for the second home than the first. On some of today's mortgages for first homes you can have a ratio as high as 95 percent. On a second home it can go a low as 85 percent - or lower. Again, all cash talks, while some of those with less have to walk.

You'll also need a higher credit score, up near 720 or better, compared to 700 or below for first mortgages that come with the best rates.

Lenders also want to see if your finances are strong enough to weather a financial storm with two or more homes. After all the mortgage costs, the lender will want to see some "seasoned" savings, money you've socked away for some time that amounts to several months worth of liquid cash to cover your mortgage principal, interest, property taxes and insurance (PITI), should hard times hit.

Because of the higher rate of failures among investment properties, compared to second homes not rented out, lenders will want investors to have a bigger fund, a six-month liquid fund.

Lenders are also going to avoid making deals in risky markets. Those are markets where there's been the most overbuilding and where local job prospects haven't seen much recovery.

Those areas are marked with unemployment rates at 9 percent or higher, limited job growth and home prices still as much as 58 percent lower than they were in 2007, according to Local Market Monitor.

They include Las Vegas, NV; West Palm Beach and Jacksonville, FL; Fresno, Bakersfield and Los Angeles, CA; Detroit, MI; Camden, NJ; Atlanta, GA; and Charlotte, NC.