If you’ve ever had the opportunity to visit Massachusetts, you know firsthand that it has so much to discover: the vibrancy and culture of historic Boston; the peace and tranquility of island living on Nantucket or Martha’s Vineyard; the natural beauty of the Berkshires in the fall; the quaint coastal communities on Cape Cod — there’s truly something for everyone.
These qualities make the Bay State a popular place for tourists to visit and, for some, to find the perfect vacation home. Perhaps you even count yourself among those who have thought about purchasing a second home in the state of Massachusetts and are finally ready to seize that opportunity. If so, there’s no time like the present to apply for a second home mortgage to afford your dream — provided you know what you’re getting into.
Before starting the hunt for the perfect home away from home in Massachusetts, let’s address some common misconceptions about second homes and about second home loans.
Mortgage 101: What Is a Second Home Mortgage?
A second home mortgage is as straightforward as its name implies: It’s a loan taken out for the purpose of buying a second home.
A second home loan is similar in many ways to a primary mortgage (the mortgage you used to purchase your first home), including basic requirements to quality. Like a primary mortgage, you must meet a certain credit score, debt-to-income (DTI) ratio and down payment as determined by the lender, as well as demonstrate a steady employment history. However, lenders consider second homes to be a greater risk than investing in a first home and, as a result, will impose more stringent requirements on potential borrowers. For example, the average down payment lenders require on a primary mortgage is 5-10 percent, whereas the average down payment on a second home loan is 20-25 percent.
Second Home (and Home Loan) Fact vs. Fiction
FICTION: If I rent out my second home, it’ll pay for itself.
FACT: For those enterprising individuals who want to rent out their vacation home when they aren’t using it, there is an opportunity to make a significant rental income — but you’ll have to put in the money and the work to achieve that goal. In addition to determining your price based on comparable rental units in the area and finding interested renters, you’ll likely have to pay high utility and maintenance fees, as well as pay for landlord insurance.
Not only that, it might be more difficult to receive approval for a second home loan if you rent out your home because it’s considered an additional risk by lenders.
That said, if you’re willing to put in the effort and pay monthly expenses, you could turn your vacation home into more than just a personal getaway — it could become a sustainable source of income, too.
FICTION: I’ll have to pay at least 20 percent down on my second home.
FACT: It’s certainly rare, but not every lender will require you to pay a 20 percent (or higher) down payment on your second home. If all other elements of your second home mortgage application are strong — your credit score, DTI ratio, employment history, and so on — you could be approved to pay as low as 10 percent down (the minimum requirement established by Fannie Mae). The right mortgage broker can help you shop lenders and determine whether one might be willing to approve you for less than 20 percent down.
As an added note, if you don’t have sufficient cash on hand to pay the down payment on your second home, you might be able to leverage the equity of your primary residence to make the payment.
FICTION: I can write off all mortgage interest from my second home from my taxes.
FACT: This one’s actually a little bit fact, a little bit fiction — it all depends on context. If you intend to use your second home as a secondary residence, the same rules about deductible mortgage interest apply as they would on the interest of your first home. That means that you can deduct property taxes (as of 2018, up to $10,000 per return) on your second home and you can write off up to $750,000 of debt secured between your first and second home.
There are, however, different sets of rules concerning taxes on rental properties — rules that vary depending on how long you rent out the property. Income from properties that are rented out for 14 days or fewer do not have to be reported to the IRS, and the mortgage interest deductions and property taxes are the same as those for a primary residence. If you rent your property for 14 days or more, you must report that income in is entirety. You can deduct rental expenses but, in order to do so, you need to break down costs between personal and rental use.
If you have any questions about the tax implications of purchasing a second home, be sure to contact a tax advisor.
FICTION: You don’t need an appraisal in order to be approved for a second home mortgage.
FACT: The only tangible differences between a first and second home loan mortgage are the requirements to quality and how the loan is invested. Otherwise, the process of applying for a second home mortgage is identical to that of a primary mortgage, including requiring a home appraisal, likely from a lender-approved appraiser.
FICTION: You have to use the same lender for your first and second home mortgages.
FACT: As a borrower, you aren’t required to take out a second home loan from the same bank or lender as you did your first. Keep in mind that the more lenders you apply to, the more credit inquiries you’ll be subject to, which can be an issue if your credit score is relatively low.
That said, it’s in your best interest to shop around for a lender. There are a wide variety of lenders to choose from, each with their own advantages and disadvantages. It’s important that you carefully evaluate each to ensure you find the one that’s right for you.
It’s Time to Look for a Mortgage Broker
Speaking of evaluating different lenders, there’s no one better equipped to walk you through the second home mortgage application process than a licensed mortgage broker. At Blue Water Mortgage Corporation, our brokers possess the knowledge and expertise to help each client find the right mortgage product, secure the best loan terms and close your loan on time. In our decades of serving the Massachusetts credit-based mortgage market, we’ve seen and done it all, so we’re confident in our ability to handle even the most challenging loan application process.
To find out whether you’re a good candidate for a second home mortgage in MA — or to separate fact from fiction on other mortgage myths — talk to the team at Blue Water today.