Regardless of if you have recently refinanced, there are options available to take the next step in obtaining the home of your dreams. Many people refinance for various reasons: utilizing home equity, shortening the length of a loan, making payments more affordable, and much more.
What We'll Cover
- Purchasing a Home after Refinancing
- Why Did You Refinance in the First Place?
- Requirements for Investing in a Second Home
- Advantages of a Second Mortgage
- Disadvantages Of A Second Mortgage
- How You Can Finance a Second Mortgage
Purchasing a home after refinancing is a popular option that can bolster your fiscal health, increase economic stability, and open up more opportunities in handling a previous refinance agreement.
Do not worry. This process can be unnerving for anyone, particularly those considering it for the first time. All of the information you need is consolidated here. This article will cover all that you need to know about purchasing a home after a refinance.
Purchasing a Home after Refinancing
Many people purchase a new home after refinancing, and it is an option for you as well, but a proper understanding of the process will save you a lot of headaches in the future.
While your lender will likely point you in the right direction, it depends on why you decide to refinance in the first place. Knowing the answer to why you are deciding to refinance is where you need to begin your analysis.
However, before getting to that, there is another thing you need to keep in mind, which is that refinancing often requires working with lenders that utilize Fannie Mae’s automated underwriting system. This system is responsible for securing your refinance and may be instrumental in purchasing a home going forward.
Fannieabi Mae’s Automated Underwriting System
Fannie Mae’s automated underwriting system, or (AUS) as it is abbreviated, is a mortgage underwriting processor responsible for determining the credibility of applicants. The system determines credibility via the following factors:
- Credit History
- Income Verification
- Home Appraisal
- Examination of Assets
These are pretty standard conditions across the board when it comes to refinancing. It is worth mentioning that not meeting these standards does not necessarily mean you cannot finance another home. However, it does mean more work for your underwriter, who can manually underwrite AUS.
Before purchasing your home after refinancing, you will need to meet the conditions of the AUS or have them underwritten as stated above. If you do not meet the conditions, the AUS will either:
- Decline your mortgage/refinancing application
- Approve with conditions
If declined, your underwriter can manually change the decision by factoring in more conditions that the automated system avoids. Some of the things that can be factored in include:
- Additional supplementary income documentation
- History of lender approval
- Proxies due to a lack of credit history or anything else
Regardless of the preliminary decision given by the AUS, your lender will inform you on what to do next. More often than not, your lender will be open to working with you to obtain loan approval. In fact, most use both automated and manual underwriting to come to a decision.
Why Did You Refinance in the First Place?
Understanding why you refinanced will help you when seeking to obtain another property. Therefore, the question is important when determining your next course of action.
Not all mortgage lenders work with those who have previously refinanced, but it largely depends on your reasons. Did you refinance because you want:
- To invest in an additional property
- To lower your previous or current mortgage
- To seek a vacation home
Each of these reasons requires different forms of documentation and a slightly different process of approval. Because of the approval process of refinancing, lenders may determine that obtaining another mortgage is too risky. To overcome this risk, you will need to be transparent with your lender about your desires.
Investing in a Second Home
Intent to occupy refers to the person’s desire to purchase a home. It is at the top of the list of conditions that mortgage lenders and underwriters look for when approving applications.
Lenders look at this when calculating the financial weight of your new mortgage. Oftentimes, the lender is concerned about whether you can afford it over why you desire it, but the reason for your purchase can influence that. In addition to this, some requirements must be met.
Requirements for Investing in a Second Home
When mortgaging for a second time, lenders do demand that you meet a few requirements. Though, many of the requirements are more suggestions.
An emblazoned rule is that you need to put up at least 10% as a down payment. The 10% down payment is a non-negotiable rule. Secondly, your assets must outweigh your liabilities. Lenders will compare the cost of your new mortgage with the cost of your previous one to help them make a decision.
Below, you will find the additional requirements and suggestions.
You deciding to purchase a second home is risky for a bank, especially if you have refinanced on a previous home. Because of this, banks and lenders generally look for the following in applications:
- A credit score of 700 or higher, which guarantees reliability and provides an excellent snapshot of your ability to handle payments.
- A debt-to-income ratio that is preferably around 50%.
- If your credit score is between 630 and 680, a down payment of 25-30% might be required.
However, lenders are flexible and likely willing to work with you despite your application suffering in a few ways. And even if you have perfect financial records, you will need to meet property requirements.
The property requirements that go into purchasing a second home are crucial. As previously stated, you cannot take out a second mortgage if you are making both of the properties your primary residences. Some additional property requirements are that:
- It must be properly kept up for annual usage
- It must be utilized by the buyer throughout the year
- It cannot be a multi-unit home
- It cannot be rented out for a full year
These rules cover the first non-negotiable one regarding the differences between an investment property and a second home. Investment properties can be rented out full-time, while second homes are not treated as such.
Furthermore, investment properties are treated differently and have higher rates than second homes.
Purchasing a Vacation Home
It can be difficult to become qualified for a new home following refinancing if your purpose is to purchase a vacation home. The reason is that your potential vacation home’s cost will be factored into the cost of your previous loan. Thus, the question of whether you can afford both will often be brought up and need to be verified.
To increase verification odds, you can:
- Bring additional pay stubs
- Verify any additional income
Your debt will count against your income, so mortgage underwriters and loan processors will want to see that your assets outweigh your liabilities. On the other hand, vacation homes generally have a less expensive rate than investment, which could increase your chances.
To further increase your chances of being approved for a vacation home, implement reserves. The more reserves you have, the more trust you will be given. Aim for 3 to 6 months of reserves in case of emergencies. Doing so will better your chances of approval.
Purchasing an Investment Home
Using your second home as an investment purchase can actually heighten the chances of you succeeding in purchasing a second home after refinancing. The reason for this is that most mortgage lenders see investments as money-making opportunities in the long run.
By adding the potential income of your investment with your general income, lenders can make a less risky decision in approving the purchase of a second home. Furthermore, many investors recoup losses by flipping their purchases or remodeling.
On the other hand, applying for an investment home is likely to hike interest rates on your property due to the nature of investments, so be wary of this.
Purchasing a Larger Home
If your goal is to refinance your previous home in hopes of moving into a larger home, it will likely be difficult for you to obtain approval. In addition to you needing income verification that outweighs your debt, there are conditions that must be met before you can make your second home your primary home.
To qualify for a loan in this category, you:
- Cannot refinance two primary residences
- Will likely have to refinance
There is no way to get around refinancing two primary residences due to a clause that most refinances have, which prevents you from purchasing a second home and moving to it immediately. If you intend to do this, you will have to wait until the time period has passed.
In addition, calculating both mortgage payments will likely lead lenders to decline a second purchase. Therefore, you may have to refinance again to bring your payments down to an acceptable range for the lenders.
These factors are crucial when negotiating with lenders, but there are some additional things that can help you gain the upper hand in financing another home. A deep examination of the advantages and disadvantages of purchasing an additional property after refinancing might help.
Advantages of a Second Mortgage
Taking on a second mortgage has plenty of advantages. When purchasing your second home, the following benefits can help sway your lender's decision if they are on the fence:
- Increased Equity
- Change in Taxes
- Lower Interest Rates
Although these are the main advantages, there are even more pros depending on what you want most when obtaining a second mortgage. Moreover, many of these advantages will help you close on your second purchase while possibly saving money in the long run.
Investing in a second home can result in the overall market value of your home increasing, which is, in itself, the definition of equity. The market value increases over time, though it can also decrease. If you are looking to increase your equity, this is one of the main ways to do so.
Moreover, due to the nature of equity, a decision such as this is very favorable to buyers seeking to invest in new property rather than permanently live there. The additional funds that will come from tapping into your equity can be used for home repairs, further increasing the market value of your second home.
Change in Taxes
In addition to equity, purchasing a second home can result in many tax benefits for the buyer. An example of this is the ability to utilize a mortgage interest deduction, which allows you to deduct the taxes you pay on your first or second home.
Moreover, with a second mortgage, you can gain a deductible on your home equity loan (provided you decided to take one on). However, there is an exception to this: it must be used on your first or second mortgage. Therefore, this is not a benefit for those that own multiple properties.
There are not many stipulations to the tax benefits offered, which is also a plus.
Many banks and credit unions offer wonderful rates for second mortgages because lenders have a strict approval process. Therefore, those that are approved are generally favored by their banks.
A secondary plus is that homes generally appreciate over time, meaning that you will likely recoup the cost of the interest payment. This is an attractive feature for those buying a second property.
Disadvantages Of A Second Mortgage
Although there are many advantages to making this decision, there are also disadvantages. Before delving into them, it is worth noting that investing in a second property, no matter the reason, is prone to be a risky investment.
Market rates fluctuate with time, and the value of your secondary investment can change with the economy. This is simply the nature of the industry.
- Lending Traps - Be careful of tapping into more than you need when borrowing from lenders. Due to the value of your investment, lenders will be more than happy to invest with you. Remember that equity rises and falls, and if you are not careful, you may end up losing value.
- Interest Rates - Interest rates are generally, as stated, great with this industry and purchase. However, the housing industry rises and falls with the economy. Provided there is a recession, interest rates on your property can increase, causing your purchase to be unaffordable.
Now that the advantages and disadvantages have been discussed, it is time to help you understand your options when it comes to purchasing a second home after refinancing. While the requirements listed earlier in the article are inevitable, there are ways to help you afford one.
How You Can Finance a Second Mortgage
There are many tools at your disposal when it comes to financing your second mortgage. Ultimately, if done correctly, your second mortgage should save or make you money in the long run. This is especially true of investment properties that you can rent to other people.
Therefore, take a look at these options to ensure that you can take this exciting step towards improving your financial future.
Open a HELOC
The first way to help you finance a secondary purchase is by opening a home equity line of credit on your primary home. What this does is convert a percentage of the equity of your home into usable cash. Depending on the amount, you could utilize this amount to purchase a second home outright.
Furthermore, this would allow you to purchase after refinancing without having to repeat the process again. However, if you would like to refinance, the funds could go toward a down payment on the second mortgage.
That being said, this process is limited and can only be utilized by users with favorable credit and good terms. Your lender can best answer your question about whether you qualify for a HELOC.
A second way to finance your second home is to utilize your equity in a refinance. To do this, take the range of your home’s value and subtract it from what you currently owe.
For example, if your home is worth $300k and you owe $100k, you could tap into the equity by refinancing and taking a lump sum from the difference. There are many loan types that allow refinancing in this way, but having good credit is the best way to tap into the most equity in your home.
Cash-out refinancing is a good idea if you want to put down a down-payment on a second home without the money coming out-of-pocket. Depending on creditworthiness, your loan limits for repayment may be incredibly affordable as well.
Secondary Convenience Loan
A final way to refinance a second home is to take out a secondary loan on the purchase itself. This option requires you to refinance for a second time, but you will likely find that the interest on your second purchase will be lower than the first.
This loan is subject to the 10% down payment rule, and it is a more popular option for those who need to stretch their payments out for a longer period of time. It is also popular if you are looking to increase your equity in both homes.
Many factors go into determining the best course of action for purchasing a house after refinancing, but a careful look at your goals, financial health, and long term plans will help you make a good decision.
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