In the heart of the winter, many American homeowners may be romanticising about a vacation home in warmer climes.
Fewer people had the opportunity to buy one last year, what with the mortgage crisis. Lenders now appear more willing to finance second homes, but borrowers must be patient, eminently qualified and strategic about their housing choices.
‘People are beginning to see some opportunities, but they have to be strong borrowers,’ said John Walsh, the president of Total Mortgage Services in Milford, Connecticut.
The improving conditions for borrowers, Mr Walsh said, come mainly from the drop in vacation home prices, not any relaxation in lending standards. The lower prices, and lower loan amounts, make it easier for people to afford a second mortgage payment.
Fannie Mae and Freddie Mac, the US government-owned companies that essentially dictate the lending standards for mortgages, have actually tightened requirements on second homes.
Borrowers must now have credit scores of at least 660 and down payments of 20 per cent to qualify; a year ago, the industry standard was a 620 or better credit score and at least 10 per cent down.
While all borrowers have faced more scrutiny, lenders consider loans on second homes riskier than those on primary homes.
Because loan requirements were in such flux last year, many lenders opted not to take a chance on second-home mortgages, fearful of being forced by Fannie and Freddie to buy back the loans if the mortgages were not underwritten precisely according to specifications, said Ellen Bitton, the chief executive of Park Avenue Mortgage in Manhattan.
‘It is better today,’ Ms Bitton said, ‘because at least there’s movement on deals.’ Lenders have been more willing to process loans on vacation homes since October, she added.
But pitfalls remain. Mr Walsh says that borrowers seeking condominiums face longer odds of success. If the share of renters in a condominium complex is more than 30 per cent, for instance, lenders will not offer a mortgage.
‘Condos are a big red flag in general,’ he said. ‘And if it’s a second home, it’s even worse.’
Also, Mr Walsh said, while Fannie and Freddie may sometimes allow lenders to offer smaller mortgages on vacation homes to those with down payments under 20 per cent, those borrowers typically must have private mortgage insurance.
He said he knew of only one company that would insure such loans, but declined to identify it for competitive reasons. In any case, he said, the company will not insure vacation homes in Arizona, California, Michigan or Nevada, because they all have high levels of home foreclosures.
Bigger loans, too, may be more difficult to secure. Take, for instance, Fannie Mae or Freddie Mac mortgages of US$417,000 to US$729,750. These loans are usually offered only in areas that have higher-than-average home prices, like New York City.
Borrowers who seek bigger loans for vacation homes must have down payments of at least 35 per cent, Ms Bitton said, contrasting that with 25 per cent a year ago.
Jumbo loans – or loans above US$729,750 in high-cost areas and above US$417,000 elsewhere – are already in short supply for primary residences. For vacation properties, such mortgages are even more difficult to secure, according to the National Association of Realtors in Washington.
Jumbo loans in resort areas have been a particular problem. In a news release last November, the realtor group said that sales on higher-priced vacation properties had been hurt by lenders seeking large down payments and ‘overdocumentation’ for even well-qualified borrowers.
The group does not release its annual report on home sales until March, but at the end of 2008, the vacation-home market was already down from its peak, in 2005. That year, 40 per cent of all sales were second homes. In 2008 the figure was 30 per cent.
Source: Business Times, 12 Jan 2010
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