UUnfortunately, just in time for baby boomers to buy a second home, it has become more expensive to borrow.
Baby boomers (born between 1946 and 1964) make up a large portion of the population in the United States. The US Census Bureau reports that the population over 65 has increased by more than a third (34.2% or 13,787,044) over the past decade ) and grew by 3.2% (1,688,924) from 2018 to 2019. The fastest climb of all ages. Although many are between 60 and 70 years old, they get on their feet with income and savings and want to own a second home.
Since this population group is considering buying a second home, there are other considerations besides creditworthiness, the evaluation of the closing costs (2-3 percent of the loan amount) and the closing process. Second home buyers should ensure their budget can handle the additional monthly payments for mortgage and interest, property taxes, home insurance, HOA fees, routine maintenance, utility bills, and potential major repairs.
Slowing down the pipeline
But in terms of second home financing, Freddie Mac and Fannie Mae have started limiting the number of second homes (and investment properties) they can mortgage on by limiting the products lenders can sell to them. The reason is the additional risk of second homes and investment properties.
And the quickest way to shut the tap and slow the flow of any particular product, be it mortgage, perfume, or macadamia nuts, is to change prices. In fact, pricing for second homes and investment properties has dramatically deteriorated with price adjustments at the loan level due to the actions of Freddie and Fannie.
Still, Freddie Mac and Fannie Mae aren’t the only games in town for lenders. But they make up the lion’s share of the market and thus their effect on rates and markets. According to the Mortgage Bankers Association, recent figures show that 16 percent of applications for all types of home loan are FHA, VA, and USDA programs. The remainder (84 percent) would be directed to Freddie and Fannie, along with a diversification of private label and portfolio products. Lenders will tell you that second home loans are not made through the FHA, VA, or USDA programs for a variety of reasons.
Second home financing always different
As a result, the price of buying a second home or investment property has become more expensive for lenders across the country due to the cap. Some lenders charge 2,250 percent (percentage of the loan amount) or more for second homes. (As a reminder, a 1 percent fee corresponds to approximately 0.25 percent interest rate.) Thus, an 80 percent loan-to-value (LTV) for a second home can now have an interest rate that is 0.500 to 0.625 percent higher than that of a main residence.
Conventional vacation rental loans have required a higher down payment than a primary residence for many years, a higher interest rate, and stricter guidelines. Even before Freddie and Fannie moved, the minimum down payment for a vacation home was typically 20 percent, but many lenders have increased their minimum down payment requirement to 30 or 35 percent for a second home.
Because of the perceived higher risk associated with a vacation home (e.g. if a borrower loses their job, monthly payments for a second home have less financial priority than their primary residence), borrowers must meet higher credit standards, possibly a lower monthly debt-to-income ratio , complete documentation of your income and assets and high cash reserves.
And now, in addition to the above credit criteria, lenders are allowed to sell this type of loan to Freddie or Fannie. However, lenders are a resourceful bunch and are looking for other outlets for this type of production. However, associated with this are higher interest rates and potential additional costs to be borne by the borrowers.
Regardless of the age or demographics of a second home buyer, many industry analysts point out that capping the funding of second homes or investment properties will negatively impact borrowing costs and have a broader impact on both short and long term rental markets. (For example, you pay more rent for a vacation home on the beach or in the mountains.) And is this really what we want from Fannie Mae and Freddie Mac?
That bigger monetary policy question aside, the answer for most qualifying consumers will be that second home finance is feasible – it will just be slightly more expensive.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.