There is a growing trend of luxury second-home purchases during COVID-19. The driving motivations are the ability to work from home combined with providing a safer travel option. The luxury housing market will continue to boom, and before you start researching your dream destination, you have some simple math to work out.
A few calculations will help you see the big picture of your finances and if you are in the position to buy a second home. This research will arm you with knowledge before you meet with a lender.
A few of the factors that will determine how much you can borrow for a second home are your debt-to-income ratio, your credit score, and your down payment. The debt-to-income ratio is determined by counting up all your debt each month and dividing it by the monthly gross income. Multiply this number by 100 to find the DTI percentage.
You can also use a DTI calculator to determine your estimated debt-to-income ratio before meeting with a lender. The number that most lenders want to see is 36% or lower before you enter into another mortgage loan.
Why Does a Good Credit Score Matter?
The lender looks at your credit score to determine how trustworthy you are to enter into a loan contract. If you have a great history of paying back debt, then your credit score will be on the high end. But if you’ve had trouble making payments on time and even skipped some payments, that will reflect in your credit score.
If your credit score is lower, the lender may still go forward with your loan, but at a higher interest rate. The higher the interest rate, the less home you will be able to afford since more of your monthly payments would go toward interest. Anything in the range of 750 to 850 is considered a good credit score.
A standard loan would include a 20% down payment on the home. If you don’t have that much cash to put down, there are loans available for 3-5% down. The lower the down payment, the higher your monthly payment will be. All of this needs to be considered before making a move on a second home purchase.
Contact a Real Estate Expert
While a home affordability calculator may give you a good idea of how much you can afford to pay for a second home, it is best to contact a professional to get a more accurate number. Providing real numbers and not missing one student loan or child support payment will ensure that you get a precise number before you go out searching for homes.
As many people are looking into vacation home purchases to keep their families safe as they travel, you may have questions about second-home purchases. Meet with a professional to discuss your options. Give Kirsten DeHart a call at Wood River Properties if you are looking to buy a luxury vacation home in Sun Valley: (208) 721-4131.