From the sandy shores of Old Saybrook to the winding trails of Wadsworth Falls State Park in Middletown, Connecticut is a tourist destination for millions of visitors each year, some of whom choose to make the Constitution State their permanent vacation locale of choice.
If you’ve ever considered buying a second home in CT — perhaps a lake house on Candlewood Lake or an investment property in downtown Hartford — there are a few things you need to know before you can achieve your goal.
Qualifying for a Second Home Mortgage
Most people who want to purchase a second property need to take out a second home mortgage in order to do so. Though that might seem like a major undertaking, it’s easier than you might think. In fact, the most challenging aspect of applying for a second home mortgage is qualifying for the loan. With that in mind, let’s take a moment to look at the requirements to qualify for a second home loan in Connecticut.
- Down payment: Second home mortgages require a higher down payment than a first mortgage; you could pay anywhere from 10 to 35 percent down depending on the lender.
- Credit: Lenders will also hold you to a higher standard as regards your credit score — many lenders require a score between 725 and 750 to qualify for a second home loan.
- DTI ratio: When applying for a second home mortgage, the lower your debt-to-income (DTI) ratio, the better. Fannie Mae allows for a DTI ratio of up to 45 percent, though 36 percent or lower is preferable.
- Reserves: When buying a second property, it’s important to ensure that you have sufficient reserves — available funds — to continue to make payments on your mortgage should you experience any interruption in your income.
Note that government loans, including VA and USDA loans, are reserved for primary residences and aren’t eligible as second home mortgages. You may, however, be eligible to apply for an FHA loan as your second home mortgage, so long as you don’t intend to use your second home as a rental property.
You should also carefully consider the tax implications of paying a second mortgage if you’re interested in buying a second home. And, as with any major purchase, it’s important to make sure you can afford two mortgage payments before you apply for a second home loan.
Vacation Home vs. Investment Property
Now that we’ve discussed the requirements to qualify for a second home loan in CT, let’s take a moment to go over the important distinctions between a vacation home and an investment property. A vacation home is exactly what it sounds like: a property used for recreational purposes for part of the year. If a vacation home is rented out for 15 or more days out of the calendar year, it is considered a rental or investment property by the Internal Revenue Service. An investment property is any real estate that is used to make a profit rather than as a primary residence; this includes residential rental properties, commercial properties and homes purchased with the intention of flipping to resell.
Beyond the obvious differences between the two, the loan application process is typically easier for borrowers who intend to buy a vacation home than an investment property and comes with less stringent down payment requirements and lower interest rates. Also, if you want to rent out your second home, your lender will likely require you to perform an additional appraisal, as well as produce a rent schedule. Taxes, insurance costs and projected profits from an investment property will all factor into your DTI ratio.
If you’d like to apply for a second home mortgage to finance an investment property in Connecticut, make sure to talk to a tax advisor to see whether you’re eligible for any tax deductions or write-offs. And a word of caution: Don’t try to pass an investment property off as a vacation home in an attempt to avoid reporting rental income to the IRS. Loan underwriters can easily detect occupancy fraud based on factors such as the relative locations of your primary and secondary residences — for example, if your vacation home is down the street from your primary residence, it’s sure to raise red flags.
Finance the Second Home of Your Dreams
Now that you’re all caught up on the requirements to qualify for a second home loan and the important distinctions between second home types, you’re ready to take the next step.
Let Blue Water Mortgage Corporation help put you in the second home of your dreams. You can count on our experience and financial expertise at every stage of the loan application process, and on any one of our licensed mortgage brokers to tirelessly advocate for you. To get started on your journey to a second home, contact us today.