When people are thinking of buying a second home, this one to be used and lived in by their parents, there’s a lot of confusion that goes around. What are the down payment requirements, and what are the requirements for getting a mortgage on a second property? These things can be confusing enough, but the reason for buying the property make it even more confusing. This is because different second properties have different mortgage requirements. And just what does that mean, anyway?
It means that if you’re buying an income property – that is, one that’s to be used as a rental property, generating income for you – you’ll need to have at least a 20 per cent down payment; and some lenders will even require as much as 35 per cent on income properties. If you do not have this amount for your down payment, you won’t even be able to apply for mortgage insurance. You’ll simply have to wait until you have enough for your down payment.
When you’re buying a second home for someone else though, such as your parents, the process is just like applying for a mortgage for yourself. You’ll need to have a good credit rating, steady employment, and a good debt-to-income ratio. What’s more is that you’ll even be able to purchase the property with as little as a 5 per cent down payment if you meet other qualifications. It is important that homeowners realize this before signing the mortgage papers, as insurance can add thousands of dollars onto the mortgage payment each and every year.
So how exactly are you going to pay for it? When you’re already a homeowner (as most people are when they’re buying their a home for their parents,) you have lots of options.
Home refinancing with a cash-out option will allow you to replace your old mortgage with an entirely new one for that same property. The cash out option will give you additional funds when the mortgage closes, and it can be a great choice when you already want to change several terms on your mortgage.
For those who are already happy with their current mortgage, a home equity loan or home equity line of credit can be a good choice. These second mortgages can still give you the extra cash you need while allowing you to borrow against the equity in your home. Those who are already homeowners will need to have at least 20 per cent equity in their current home; and this can be used as the down payment on the second home for your parents.
Buying a home for your parents can be an incredibly generous and exciting thing. Don’t confuse it though with a rental property. Requirements for the two are extremely different, and your parents’ home will be much easier to obtain.