Flipping Fixer Upper Homes

After purchasing one home, it's not unusual for homeowners to contemplate getting another one to use for investment purposes or a vacation spot. However, there are several issues you'll run into when purchasing a second home that you must be prepared for; otherwise, your quest to secure another home may get derailed before you can make it to the finish line. Here's what you need to know.

You May Need a Bigger Down Payment

Banks generally don't like taking a lot of risks, and the purchase of a second home when you're already on the hook for a mortgage represents a significant risk to them. Therefore, even though you may have plenty of income to cover the monthly payment for the second property, the bank may require you to pay a larger down payment before it will approve your mortgage application.

For instance, depending on your financial circumstances and the mortgager, you can typically get away with putting up a 3.5 percent down payment on a first home. However, the bank may want you to put up 20 to 30 percent on a second home to reduce the amount of principle it has to finance.

Additionally, you'll have to be careful to avoid incurring new debt when getting the money together for your down payment; otherwise, you may put yourself over the maximum 43 percent debt-to-income ratio and have your application denied as a result.

You May Need a Higher Credit Score

Lenders tend to be more forgiving when it comes to poor credit scores when you're purchasing a first home. For example, FHA will approve you for a loan with a score as low as 500. When it comes to a second home, however, banks typically require applicants to have a much higher score.

Again, this has to do with the bank's desire to mitigate risks. People are typically very protective of their first homes because those homes are typically their primary residences. The bank may feel you won't be as committed to a second home and, thus, more willing to let the payments slide on a second mortgage the moment you start experiencing financial problems.

For that reason, the bank wants to make doubly sure you will pay your bills on time, and many lenders require applicant's to have scores in the 700 range. Even Fannie Mae—a mortgage guarantor—requires buyers to have at least a 640 credit score to be approved for a second mortgage through their program.

It's a good idea to get a copy of your credit report and take steps to raise your score as high as possible before you being shopping for second homes so that you're more likely to meet any minimum score required by the bank.

You May Have a Harder Time Getting Affordable Insurance

A third issue that may arise when purchasing a second home is it you might have a harder time finding affordable home insurance. Like banks, insurance companies want to keep their risks as low as possible. Their top concern, however, is second homes may not be maintained as well as primary homes are, which can set the stage for problems to erupt that may lead to claims against the policy (e.g. broken pipes, structural damage, etc).

Additionally, if you plan to rent the home to generate income, you'll need to obtain landlord insurance to protect the property from damage caused by the tenants. As a result, you may be charged more for regular coverage or you may have to get additional policy riders to that protect against an assortment of issues that may arise from how you intend to use the property.

For more information about these issues or help picking out a second home that's right for you, contact a real estate agent.