Why it’s gotten harder to buy a second home

It’s a question that Fenton Soliz, a senior lending
officer at Bank of America in White Plains, N.Y., is asked frequently. “I get a
lot of second home requests, and slightly more since Covid,” said Mr. Soliz.
Many of the requests are from affluent individuals and couples “who have been
thinking about a second home as part of their life planning for many years…now
they’re thinking about how to finance it.”

Before Covid, it was simple to advise buyers to use
equity in their primary home to purchase a second home. That way, the borrower
ends up with just one mortgage to support two homes. Credit conditions were
easy and bankers were eager to extend these loans.

But as with all other things during the time of Corona, financing decisions have become a little trickier. Last spring, many lenders began tightening credit requirements in response to the pandemic. With millions of Americans out of work and falling behind on their mortgage payments, lenders worried that delinquencies would surge — and they did.

While conditions are improving and some lenders are starting to ease up, conditions still aren’t back to pre-Covid times. As a result, even homeowners with sterling credit, high incomes and strong job security will still find that there are slightly fewer options available for financing a second home than a year ago. Here are some of them:

Cash-out,
maybe, kind of

Before the pandemic, cash-out refinancing was a
popular way to buy a vacation home. 
Here’s why. Say you took out a mortgage 10 years ago to purchase a
$500,000 primary home that is now valued at $900,000. And say you still owe
$400,000 on the house.

Pre-Covid, some lenders would let you refinance that
mortgage, usually at a lower rate, and take out a new mortgage for up to 90% of
the home’s current value. In the hypothetical case above, if you took out the
maximum,  assuming you qualify for the higher loan,  you would be left with a little over
$400,000 in cash, which you could use to buy a vacation home. 

But fewer of those transactions are taking place these days. Many banks have either cut back on the amount a borrower can take out in a cash-out refi or eliminated cash-out altogether.  Wells Fargo & Co., WFC, +2.29% one of the nation’s largest mortgage lenders, “suspended the origination of all cash out refinances in April,” according to a bank spokesman. Yes, all.

Bank of America, BAC, +2.17% another big lender, still originates cash-out refis but it cut the max amount of cash a borrower can extract to $250,000 from $500,000. The bank makes exceptions and allows for larger cash-out refis for some of its private banking customers, who are high-net-worth individuals with sizable assets, usually over $500,000.

Bank of America isn’t the only bank with more accommodating rules for private banking clients. So here’s a word to the wise: If you have sizable funds invested in a retirement or brokerage account and aren’t already a private banking customer, now is a good time to sign up. (Private banking customers get other perks, too, like VIP tickets to events… Okay, yeah, there aren’t any big events taking place right now, but we’re thinking ahead to post-Covid days.)

Borrower
beware: Before
refinancing, it’s important to consider the costs and fees that banks tack on
to a refinancing. Borrowers need to figure out how long it will take to recoup
these costs vs the savings that result from a lower monthly payment. Borrowers
should also consider that a refinance extends the time over which the loan will
be repaid, which can result in paying more interest over the life of the loan
than they otherwise would have paid.

The options you
have left

Okay, so you’re not a private banking customer and
your bank has eliminated cash-out refi or you decided the cost of refinancing
is too high. But you still want to buy your dream vacation home and you need
credit to swing it. More than likely, you’ll need to get a purchase loan.

The good news is that mortgage rates on purchase loans
are lower than on refinancing loans. Earlier this week, Wells Fargo was posting
rates of 2.5% on a fixed-rate 30-year conventional purchase loan and 2.75% for
a 30-year fixed-rate refinancing loan. Rates on jumbo mortgages, which are
mortgages that exceed $548,000 on a single-family home, were about .375
percentage points higher.

Bank of America posted
similar rates for purchase and refi loans, but the bank’s jumbo rates are
actually a little lower than conventional loans.

Some banks require larger down payments and higher minimum credit scores for second home mortgages, meaning they are slightly harder to obtain than a mortgage on a primary home.

But at the end of the day, while taking out a purchase
loan to buy your escape home may not be as convenient as using cash-out refi,
in the long run you can save money …which you can use to furnish the place.

This article is reprinted by permission from The
Escape Home, a newsletter for second
homeowners and those who want to be. Subscribe here. © 2020. All rights reserved.