Frustrating. That’s what it is. At a time when homes — especially second homes in some regions — are dropping in price, it’s getting harder to get a loan to buy one. Banks, naturally skittish after this year’s mortgage crisis, are tightening their purse strings, and it takes a lot to tug them open.
“The interesting part is that you’re going to get some of your best buys in your second-home markets right now,” said Marc Schwaber, president of Preferred Empire Mortgage. In his own search for a property in Florida, Mr. Schwaber has found prices that have dropped 50 percent in the past two to three years. “The second-home market in many ways holds its value really well, and people want second homes. But banks can’t seem to ease up on their guidelines.”
The caution is understandable. “Look at it from a lender’s perspective,” said Eric Tyson, a former financial adviser and co-author of “Home Buying for Dummies.”
“It all comes back to what is the risk of defaulting on the loan? And worried lenders are finding out today how high the default rate can be on homes in which people live. If it’s a second home, and not even your primary residence, there’s potentially even more temptation and ease to walk away from a property.”
But, Mr. Schwaber added, “It doesn’t matter if it’s a primary or second home.” To him, the more pressing concern for banks is: Does the client fit the ratios?”
“I’ve been in this business since the mid-’80s — the old rule of thumb was called 28-36, which meant that you could spend 28 percent of income on primary housing expenses and 36 percent of your income over all,” Mr. Schwaber said. “Is it easier for primary or secondary? The answer is your secondary home has to fit into a certain ratio. Each bank these days sets guidelines for their ratios, and there’s no such thing as 28-36 anymore.”
Instead, he continued, banks look at a range of factors, including income, assets, credit and post-closing liquidity. “If you have a tremendous amount of post-closing liquidity, and can put a good amount of money down,” he said, “would that not qualify you differently than someone who may be able to put a lesser amount of money down or have less money after the transaction is complete? The banks are starting to use common sense underwriting again.”
What a strange concept, right? “Lenders are doing what they used to years back,” Mr. Tyson said with a laugh, “which is that they’re making loans with people they think have a very high probability of paying them back. And they’re actually getting down payments from people again, and realizing that if someone has 20 percent down payment on a property, they’re far less likely to walk away from it.”
What this means for buyers is that they’re going to face tougher lending criteria. “People can expect their financial situation will very much be scrutinized, and they’re going to have to put up a pretty reasonable-sized down payment,” Mr. Tyson said. “Probably on the order of 20 to 30 percent.”
To bolster your chances, examine your credit reports. Then, research the mortgage criteria of different banks. “One bank may have the best rates in the world and might have much tougher guidelines,” Mr. Schwaber said, “where another may have slightly higher interest rates, but they’re a little more lax on their guidelines.”
Also, Mr. Tyson cautioned, more than ever, make sure you can really afford that vacation spot. “You should take a look at your overall financial situation,” he said, “and be realistic about how your cash flow’s going to change once you have the burden of second property.”
Most important, don’t be fooled by what a lender may tell you. “I’ve long said that if a lender tells you that you can borrow up to $300,000, that doesn’t mean you can really afford that,” Mr. Tyson said. “The lender’s not going to look at how many kids you’re going to put through college or if you’re caring for elderly parents.
“That’s why you need to look at the overall financial situation yourself. If a lender’s not willing to make you a given-size loan, that’s probably a good sign that you can’t afford it. But just because they’re willing to lend you the money, doesn’t mean you can afford it.”