Buying a second (or third) home in this economic climate is challenging, but rewards may be bigger than ever
Issues for Second Home Buyers
How has the mortgage crisis changed financing a second home? Obviously in all real estate today, bank requirements are tighter and expected down payments are larger. And this is even more so in the second-home market.
According to the National Association of Realtors, during the real estate boom of 2005, 40 percent of residential real estate transactions were second home and investment purchases. Last year, they accounted for only 27 percent. “Back then, buying a second home was virtually the same as buying a principal residence,” says Jack Baldaserini of Century21 Landmark Properties in Connecticut. “The days of little or no money down are over. Plus, be prepared for voluminous information requests and paperwork from the bank.”
Low-down-payment FHA loans aren’t available to second home purchasers. That generally means a minimum of 20 percent down is required. And since most equestrian property mortgages require “jumbo” loans, an even larger down payment is required, probably at least 25 to 30 percent.
But even with a large down payment, getting financing might still prove difficult. According to Tom Lutz, a horseman and mortgage expert (see interview), “…most of the larger national banks and mortgage lenders tend to stay within secondary-market guidelines and do not appreciate [or understand] horse property values. Therefore they may be unable to finance your purchase. In an area where horse farms are prevalent, chances are the local banks will appreciate the values and work with you, even if it means keeping the loan in the bank’s own portfolio.” There are other sources as well. Farm Credit Services is a network of independently owned and operated credit and financial services institutions that specialize in farm financing. “And don’t forget.” Baldaserini adds, “Some sellers will take back loans. That’s a question most buyers forget to ask.”
Finally, what about cash? Second-home buyers generally are older and more affluent than other buyers -- from 36 to 59 percent pay all cash. Cash greatly simplifies the buying process. There’s no need for bank appraisals and huge application forms. Plus additional options are available in cash transactions that may not be possible for bank-financed properties. For example, foreclosures and buildings in poor condition, that may offer higher possible returns when selling.
But don’t be discouraged. Although buying a second home in this economic climate is challenging, the rewards of purchasing during the down market may be bigger than ever.