Is down payment for a second home really necessary?Answer:
Lenders give a lot of importance to down payment if you are looking to get a loan for a second home. In fact, it is one of the main factors that determine qualification for a second mortgage.
With the housing market decline in the country, lenders are playing safe and looking for mortgagees who can make higher down payments, especially in the case of second homes. For second homes, without insurance, the down payment requirement is at least 20% of the loan, for most lenders.
Why is the down payment so important?
Lenders use your down payment to calculate the Loan-to-Value (LTV) ratio. LTV is simply the percentage of the total amount you owe to the lender after making the down payment.
For example, on a $100,000 mortgage, a down payment of $30,000 means a LTV ratio of 70%. The higher the LTV, the more difficult it is to qualify for a loan.
The amount of down payment is also used to determine the benchmark for the interest rate on mortgages. Lower down payments usually mean higher interest rates because the risk increases for the lender.
The amount of down payment also determines whether you need to buy Private Mortgage Insurance* (PMI). Usually if the down payment is less than 20% Lenders require borrowers to buy PMI. This obviously increases the total cost of the loan.
Keeping Your Down Payment Low for a Second Home
If you want to get a second home loan with a low down payment and no PMI, then you must keep your credit rating very good.
You could also try looking for a house with a lower purchase price for your second home. This will positively impact your LTV, because the same amount of down payment would yield a lower LTV for that loan and may help you qualify for a mortgage.
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