Sometimes buying just one house doesn’t work. Perhaps one partner took a job in another city but you don’t want to relocate the whole family. Or maybe a family member is ill and you need to be closer to them. Or maybe you want to purchase a second home to add rental income to your finances. Some just want a vacation home that they don’t have to rent from someone else. Whatever the reason, you want a second house. The process of buying a second home is not the same as buying your first, so use the following steps to successfully buy a second time around.
Square Your Finances
You will only obtain financing a second time if your finances are in order. You don’t have to be a millionaire but you do have to have the financial reserves or income to show that you will easily be able to make the payments when you do purchase. A substantial savings or down payment will help; aim for at least 20% if you can. Then you’ll be able to buy any house within your budget with confidence. Also pay down any debts you can to lower your debt to income ratio as much as possible. Now is not the time to open or close any credit cards or bank accounts, change jobs (unless it’s a great promotion), or make other major life changes. You want to show that your life and budget is stable and that your income will remain steady.
Here’s one time when you don’t want to use online lenders. Talk to a broker in person who will hear your story and whom you can talk to personally. Explain the why behind the decision and how you’re going to make it work. Keep in mind that lenders want to see that your additional mortgage payment plus your current expenses won’t top 35% or so of your income. If you can show that the second mortgage won’t break your budget you’ll have a better shot at getting the bank to lend you more money. You may have to pay a higher interest rate to cover the risk, so keep that in mind when you negotiate with a lender.
Speak with a Real Estate Agent
Real estate agents exist to help you. When you finally obtain financing, talk to a real estate agent who knows the area you’re looking at buying in. Look for companies who work in multiple areas of the country, such as like Miller Countrywide. Or, ask your contacts in the area you’re buying who they’d recommend. An agent will help expedite your search process and will know how to navigate the legalities of a second home. He or she will also be able to help you rent out or sell either of your homes should you need it. Your agent will be your friend through this process so choose one that you enjoy working with.
Speak with a Tax Advisor
Increased taxes are one often overlooked consequence of buying a second home. The biggest hit will come when you decide to sell one of the homes, since only one home can be listed with the government as your primary residence even if you live in both of them. More information can be found on the government’s revenue and customs website. The special tax schemes change frequently, so talk to a tax advisor who can help you navigate your unique circumstances.
Buy Only What You Need
One of the biggest risks of buying a second home is over committing. A second home comes with a second set of costs: a second mortgage, a second insurance policy, a second set of utilities, and all the time and costs associated with maintaining a second home. The costs can quickly add up to more than you budgeted for. Remember that this second home is an addition, and not a replacement for your first home. Buy only as large as you need to live. Smaller homes are easier to rent out as they’ll be more affordable for potential renters, so keep that in mind as well when you buy.
By reducing your debt and saving for a down payment you can get a mortgage that allows you to buy again. Oh, and what not to do? Don’t take out a mortgage on your current home (you could lose both properties in the case of foreclosure) and don’t lie to the lender about your intentions. Being honest and up-front helps the lender give you the loan that actually works for your situation. While it’s not easy to obtain a second home, it’s not impossible either. The steps outlined here will help you get on the right track.
Patrick Foley has experience of sourcing properties for clients. He likes to be able to share property investing insights with an online audience and writes regularly for a number of property and investment websites.