October 15, 2018
Orion’s brokers remind their clients that a vacation home is known as a second home, and although many are preparing for winter, others are thinking this is the time of year to buy a 2nd home somewhere. Our AEs remind brokers about the basic lending rules for second homes - like the rules for primary residences. Someone can purchase a second home with only 10% down, the cost of the loan in terms of rates and fees is the same as with a primary residence.
There are some factors to consider when obtaining a mortgage for a second home. First, since it is to be used as a residence the client must be able to qualify for the total housing payment for their current residence plus the second home they are purchasing. Second, the second home must be "geographically distant" from the client’s primary residence. If they live in a neighborhood on the westside of Los Angeles and want to purchase a condo in Santa Monica as a second home, the client will have a hard time finding a lender that would approve the transaction. Additionally, some lenders require second homes to be traditional resort or vacation areas. To qualify as a second home, the intent must be obvious. If your client is trying to stretch a viable explanation, then chances are the underwriters will have a difficulty believing the property will be used as a residence and not a rental or investment property.
Many clients ask about how they can convert a second home to an investment property in the future. This can occur if they have fulfilled the intent to occupy that is agreed to as part of their application process and by signing the Trust Deed. If Orion or the ultimate investor can determine that the borrower never intended to use the property as a residence they can issue a Notice of Default and demand the mortgage be paid in full.
For your clients nearing retirement, purchasing a second home where they are considering living can be a very good financial decision. When the time comes to retire they may decide to sell their current primary residence, possibly using the proceeds of the sale to pay off their retirement home and enter retirement without the number one cost for retirees: housing. Your Orion AE may have some creative thoughts.
One additional side note. Be sure to remind your clients to investigate tax policies of the federal government and the states. Our AEs are not tax advisors, but as you can imagine there are sections of the tax code that deal with second homes and how your client can, or must, treat them when filing taxes.