If you have a primary residence and are thinking of buying a second home somewhere warmer or somewhere that you like to visit, you may be eligible for a second mortgage. Unfortunately, most of the low or no down payment programs available are only for primary residences. So what are you to do if you want to buy a second home but don’t have the cash for a down payment?
It’s time to get creative. There are a few ways that you can buy a second home with little to no money of your own down on it.
Take Out a Home Equity Loan
Your first option is to take out a home equity loan. This would be a second mortgage on your primary residence. You can use the funds from the proceeds of that loan to buy your second home. Of course, you’ll have to qualify for the home equity loan, but luckily, the guidelines are pretty flexible.
First, you should know that you can shop around. You don’t have to use your current lender for your home equity loan. Unlike primary mortgages, your chosen lender will likely hold onto your second mortgage. They won’t sell it to investors on the secondary market. This means you have fewer ‘hands in the pot’ or people giving you guidelines. It also means that there aren’t blanket guidelines across the board. They may vary by lender. In general, though, you can expect the following guidelines:
- Minimum 620 credit score
- Maximum 80% total LTV
- Proof that you can afford both your first and second mortgage payments
- Stable income/employment
- No late payments on your current mortgage
Of course, each lender may add their own requirements as they see fit. The nice thing about any home equity loan program, though, is the lender can make case-by-case decisions rather than making sure you fit the mold of a higher entity’s guidelines.
If you qualify for the home equity loan, you can use those funds to make the down payment on your second home and/or cover the closing costs.
Ask for Gift Funds
If you have a family member, employer, or charitable contributor that is willing to provide you with down payment funds, you can accept gift funds for the down payment. The donor can provide you with 100% of the down payment necessary, if it’s feasible for them.
In order for the gift funds to count, you must be able to document the gift. The lender will require a signed letter from the donor stating the purpose of the gift, its amount, and the fact that it’s not a loan and/or no repayment is required.
The donor must also be able to provide proof of the origination of the funds. For example, if they had the funds in their checking account, a statement from their checking account for the last two months will suffice. If, on the other hand, they sold a stock to give you the money, they will need to provide proof of the sale and receipt of the funds. You must then provide documentation of receipt of the funds from the donor as well as documentation that you deposited the funds in your bank account.
The lender needs to know beyond a reasonable doubt that the funds are not a loan. If the funds are a loan, the lender would have to include the payment in your debt ratio to make sure that you still qualify for the loan.
Sale of an Asset
If you have any assets that you want to liquidate, you can use those funds as your down payment as well. Before you sell the asset, though, make sure you have enough documentation to prove the sale to the lender.
Because you’ll likely receive a large amount of money at once, you’ll need to be able to document it. Let’ say, for example, that you will sell your extra car. You had a sports car that you drove for fun, but have decided you’d rather invest the money in a second home. When you find a buyer, you must draw up a proper Bill of Sale. Both parties must sign the document. You must also have proof of receipt of the payment. A copy of the check will suffice. Finally, you’ll need to document that you deposited the funds, by providing your deposit receipt for the exact amount of the check received from the buyer.
These are the best ways to buy a second home without a saved down payment. Unlike primary residence purchases, there isn’t a no down payment program. USDA and VA programs, which provide 100% financing are only for owner-occupied properties.