Dreaming that falling real estate prices have finally brought a vacation home within reach? Could be, but read on first.
After years of double-digit growth, prices in popular hot spots like the Florida Keys and Palm Beach have dropped 10 percent over the past year. Home values in beach markets like Cape Cod and Cape May, N.J. and mountain destinations such as the Berkshires in Massachusetts have also started to turn down.
Of course, the ugliness may not be over in several 2005 spots. In Phoenix and Fort Lauderdale, for example, her firm is projecting 12 to 20 percent price drops from the peak - but much of that decline is still to come in 2008.
The best deals may be in destinations that buyers overlooked during the boom. Those include the Adirondacks in New York, the White Mountains in New Hampshire, the Great Smokey Mountains in Tennessee and the Florida Panhandle.
But just as the window is starting to open on vacation-home prices, another one is slamming shut: financing. The mortgage crisis has crushed the confidence of over eager lenders, if they havn't shut down and boarded up the windows for good yet. When you set out to pay for a second home today, you'll have to work within these rules:
Show Me the money, and lots of it
At the height of the mortgage craze, lending guidelines were so loose that a down payment was seen as optional. Not anymore. You'll need to put down at least 10 percent and more likely 20 to 30 percent to nab your beachfront or mountainside pad.
What's more, forget raiding the equity in your first home to get the cash for your second one. Even with rates on second-home mortgages about a percentage point higher than those on first-home loans, that's still less than the punishing 8.2 percent you'll pay on a home-equity loan today.
No Really, show Me the money
For lenders the mantra today is don't trust, verify. Stated income loans, popularly known as liars' loans, are history. Expect to be asked to produce proof of your income. When it comes to affordability, lenders want to see that you earn enough to sustain payments on two loans - and don't want to see your total housing payments (first and vacation) top 40 percent of your income. At the height of the boom, that cap was more like 55 percent.
On top of that, you may have to show that you have six months' worth of home payments in reserve in case you lose a job or have any kind of financial calamity.
Be ready to back up your claims
If you need to rent out your home to afford it, count on lenders taking a hard look at how much you plan to charge. Also keep in mind, that lenders will figure that a quarter of your rent will go to upkeep, not your loan payments.
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