When it comes to financing the purchase of a new home, the conventional home loan is one of the most popular options. In this article we will address some of the basics that any home buyer looking to purchase a second home or investment property with a conventional loan, should know.
Loan Type: When someone discusses a conventional home loan, they are generally referring to a Fannie Mae or Freddie Mac backed loan with a conforming loan limit.
Furthermore for clarification purposes, a second home would be classified as a home in a different metropolitan area than a primary home that you live in, that may be lived in less frequently than one’s primary home. For example, if you lived in Phoenix, Arizona and owned another home in Flagstaff, Arizona or San Diego, CA, either of these might be considered a secondary home.
On the other hand, an investment property is considered to be any property that is owned by someone for the purposes of investment or rental income. For instance, if you lived in Phoenix, Arizona and purchased a second home to rent it out, that would be considered an investment home.
Loan Amounts: The conforming loan limit for a conventional home loan currently sits at $417,000 in most areas of the country, except for certain designated high cost counties, for which higher limits are allowed. Here in Arizona, all conventional loan limits currently sit at $417,000.
Down Payments: For a second home, the minimum down payment is 10% of the purchase price. For an investment home, the minimum down payment is 15% of the purchase price.
Credit Scores: In general the minimum credit score for a conventional home loan is a 620 credit score. However, on a conventional home loan you are rewarded with the best available interest rate with a 740 credit score and then every 20 points your score is below that level, there could be an effect on your actual interest rate.
Debt To Income Ratios: The debt to income ratio is another important part of qualifying for a home loan and refers to a ratio of your monthly gross pay versus your monthly payments. For instance, if you had a gross salary of $60,000 or $5,000 per month and all of your current payments that appear on your credit report (credit cards, auto loans, student loans, etc.) and your new potential mortgage payment equal $2,000, then your debt to income ratio would be 40% ($2,000 / $5,000). In general, it is best to have your total debt to income ratio not exceed 45% if you are looking to be approved for a new conventional home loan.
Employment History: Lastly when it comes to qualify for a conventional home loan, in general you want to be able to show two years’ work experience in the line of work you are currently in. It is ok to have switched jobs in the past two years, so long as the positions are in a similar line of work. In addition, if you graduated from college less than two years ago, the two year work requirement can be waived if your college experience was preparation for your current employment position.
These are just some of the basics of obtaining a conventional home loan to purchase a second home or investment property, but at the same time, if you adhere to the standards above, then you stand a good chance of putting yourself in position to qualify for a conventional home loan.
As always, it is best to sit down with a licensed mortgage lender, such as Strategic Mortgage and fully qualify to see if you are ready to purchase a new home.
For more information on current home loan programs and options for existing and potential home owners, please contact Bill Kamboukos of Strategic Mortgage at (480) 219-3682 or by emailing: info@strategicmtgaz.com or online at www.strategicmtgaz.com
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Vasilios Bill Kamboukos Jr – NMLS#160440
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