What is an FHA loan?If it’s been awhile since you applied for your FHA loan, here’s a refresher on some of the distinguishing characteristics between an FHA loan for a primary home and a conventional loan for a primary home. An FHA loan:
- Is backed by the Federal Housing Administration (FHA) which will pay your lender if you default on your loan
- Allows for a lower credit score than a conventional loan because of the added protection to lenders
- Has a lower loan amount limit compared to other conventional loans offered in the same geographical area
- Requires you to pay a mortgage insurance fee of 1.75% of the home’s value if your down payment is less than 20% of the loan value
Second home mortgages vs. FHA loansThe biggest difference between FHA loans and second home mortgages is that lenders consider second home mortgages to be higher risk. They know that in a financial crisis you’re more likely to make mortgage payments on the loan for your primary residence than you are on a vacation home. For that reason, the qualifications for a second home mortgage are stricter than those for an FHA loan. Here are the similarities and differences between a FHA loan and a second home mortgage.
Credit scoreBecause an FHA loan is designed to help first-time buyers achieve home ownership, the credit score requirements for an FHA-backed loan are lower than they are for a second home mortgage. FHA loans typically require a minimum credit score of 620, while a second home mortgage is usually 680 or higher.
Debt-to-income ratioYour debt-to-income ratio (DTI) is calculated by comparing the amount of debt you’re carrying to your income. With an FHA loan, your DTI maximum is 57%. But your DTI cannot exceed 45% for a second home mortgage.
Down paymentA second home mortgage will have a higher down payment than your FHA loan, usually a 10% minimum compared to 3% with the FHA. However, one benefit of your second home loan is that you can take advantage of your first home’s equity and use a home equity line of credit (HELOC) or cash-out refinance to pay for all or part of the down payment for your second home.
Interest ratesAs you may have guessed, a second home mortgage will have a higher interest rate than an FHA loan. It will also be higher if your second home is classified as an investment property rather than a vacation home (see “Investment properties vs. vacation homes” below). Keep in mind that interest rates vary by lender, so it’s a good idea to shop around.
Type of homeFHA loans allow for duplexes and other multi-family dwellings, but second home mortgages are for single-unit homes only, unless it’s classified as an investment property.
Closing costsBoth FHA loans and second home mortgages require closing costs, but these can vary from lender to lender.
Property taxesMany second home mortgages will roll property taxes into your monthly payment, similar to an FHA loan.
LendersMost lenders that offer FHA loans and conventional mortgages for primary residences also have second home mortgages.
Investment properties vs. vacation homesLoan requirements will vary depending on how your second home is classified, with a vacation home having more lenient terms than an investment property. But how does a lender differentiate between an investment property and a vacation home? A vacation home:
- Cannot be rented out more than 180 days out of the year
- Must be occupied by you (the owner) more than 14 days out of the year
- Must be 50 miles or more from your primary home