Second home mortgage vs. FHA loan: What you need to know

Whether you're applying for a mortgage for your first or second home, a letter of explanation can be vital to qualifying for home loan funding. If an underwriter requests a letter of explanation, welcome it as an opportunity to clarify your financial situation and clear up any confusion about your credit history or assets. A letter of explanation is particularly useful when an underwriter has concerns during the loan or mortgage application process. It addresses issues such as past bankruptcies or gaps in employment, ensuring a transparent and comprehensive understanding of the applicant's financial standing. Underwriters examine your financial history and determine if you qualify for the home loan you’re applying for. Since loan applications don’t include space for explanations, an underwriter may request that you submit a letter of explanation as evidence that you meet the funding criteria. Why do you need a letter of explanation? There are several reasons why an underwriter or mortgage lender may request a signed letter of explanation, particularly when it comes to a Here are some of the most common reasons you may need to write a letter of explanation. 1. You have a poor credit history Your credit history helps lenders know how you’ve handled debt in the past. The following red flags can potentially indicate poor debt management and may require a letter of explanation: If your credit score is low, it may be in your best interest to have a letter of explanation on standby. Share how you got negative marks on your credit history, and explain why you are still a good candidate for the loan. 2. You don’t have rental history Ideally, lenders want to see that you have a consistent rental history for the last 12 months. This reassures them that you will be able to handle regular mortgage payments.  If you have a gap in your rental history, explain the cause. Caring for a family member or recovering from an accident are possible explanations for a rental hiatus. 3. You have employment gaps Similar to your rental history, lenders prefer to see consistent employment in the year before your loan application. This shows the lender that you have the income to make regular mortgage payments. A lender can be flexible when they know more about the circumstances that led to an employment gap. Being laid off or raising children are possible explanations for the lack of recent work experience. 4. You report different addresses If the address on your driver’s license does not match the address on your loan application or credit report, a lender may ask you to explain the discrepancy. 5. Your income is inconsistent Underwriters will carefully review your income. If it fluctuates often, they may request a letter of explanation. If you are self-employed, your accountant may also have to write a letter of explanation to verify how you generate your income. You might also find it helpful to use a 6. You work remotely If your remote career is tied to an address in a city or state that is different from where you are buying a home, especially if that home is intended to function as a second home office, a lender may request that your company provide a letter of explanation verifying that your job (and income) will not be affected by your move. This situation is becoming increasingly common with the rise of “ 7. You have substantial losses on your tax return If you are a self-employed business owner or independent contractor, it’s normal to file losses on your first few tax returns. A lender may request a letter of explanation to ensure that these losses will not be recurring or affect your ability to make regular mortgage payments.  8. You cosigned a loan In the event that you cosigned a loan, a lender will want a letter of explanation stipulating that you are not the one making the payments. This can apply to student loans, auto loans and mortgages, even for a 9. You opened a new credit account If you open a new credit account while applying for a mortgage loan, a lender may suspect that the debt could affect your ability to repay your loan. Remember that the underwriter will also review your finances during closing, so hold off on opening new lines of credit until the sale is complete, if possible. 10. Your family members are on your bank statements If multiple people appear on your bank statements, like parents or children, you will need to write a letter explaining that you’re in control of the funds being used to pay for your new home. Anyone who helps you with the down payment of the home will also be responsible for writing a gift letter of explanation. 11. Your accounts are under fraud alert A lender will want to know that you’re aware of any suspicious activity on your credit report. If your accounts are under fraud alert or your credit is frozen, prepare a letter of explanation that outlines how you will regain control of your finances. How to write a letter of explanation step by step Before you write a letter of explanation for a mortgage, you’ll need some information first. Some of this you’ll have readily available (like your name), but you might have to gather or research other details, such as specific dates or documentation related to the situation you're explaining. Some of the common pieces of information you’ll need include:  Once you have your personal information on standby, you can construct a thoughtful letter of explanation detailing your circumstances and readiness to be a homeowner. Here is how to write a letter of explanation: Tips for a stronger letter of explanation Writing a letter of explanation can get you one step closer to Letter of explanation sample Keeping your explanation letter short and sweet is key. If you're struggling to write a concise letter of explanation, here is a letter of explanation sample to use as a guide and point of reference Letter of explanation template To make the process even easier, download this free letter of explanation template. Just fill in your information and personalize as needed. Why is a letter of explanation needed for a vacation home mortgage? Lenders may request a letter of explanation to better understand certain aspects of your financial or credit history before approving a vacation home mortgage. This helps them assess your ability to manage the new loan responsibly. Common situations include: If managing multiple mortgages or a high loan balance feels daunting, you may want to explore How does Pacaso help with vacation home financing? Refer back to our free template if you need help preparing an explanation letter for your next real estate purchase. And don’t forget to

Owning a second home is more attainable than ever, thanks to a variety of financing options, moderate interest rates and the new model of LLC co-ownership. But before you take the leap, it's important to know what you're getting into when it comes to financing a second home.  From budgeting for the unexpected to differences between loan requirements, doing your research helps you make the right financing decisions so you can enjoy your second home with no regrets.  What are the hidden expenses in a second home?  When shopping for your ideal second home, it can be tempting to focus only on a property's list price and monthly mortgage payments. However, owning a second home comes with other financial responsibilities. Crunch those numbers, too, before you look into financing. Budget for:  What's different about Pacaso's LLC co-ownership model With What do I need to know about financing a second home? If you own your primary residence, you're probably familiar with the process of financing a home. While many of the steps are the same, there are a few important things that are different when getting a home mortgage on a second home. Here's what you need to know.  Financing options for second homes The good news is there are multiple ways to pay for a second home, including combining more than one strategy, including these: How is taking out a mortgage on a second home different? Once you've calculated the costs and you know how much you're ready to spend for your second home, it's time to think about financing. Your first thought might be a traditional mortgage — after all, that's probably how you financed your first home.  However, while a mortgage for a second home has all the same elements as a traditional first mortgage — a down payment, credit score checks, debt to income ratio calculations — the qualification criteria isn't quite the same when it comes to financing a second home.  Here are a few things to know about financing your second home with a mortgage: How long it takes to get a second home mortgage Once you've found the Differences between a second home and an investment property People often use the phrases "second home" and "investment property" interchangeably, but practically speaking, they're To qualify as a second home, it must be used by you at least 14 days each year. And, you can't earn rental income on it more than 180 days of the year. The home also must be Alternatively, an investment property is occupied by you fewer than 14 days each year. It may generate short-term or long-term rental income, and it can be within 50 miles of your primary residence. These distinctions can make a big difference in affording a second home. A home mortgage for an investment property often requires a higher down payment, better debt to income ratio and a higher interest rate than a second home, as it's seen as a riskier investment. Pacaso's integrated financing options In addition to the cash and credit options discussed above, Pacaso works with partner banks to offer competitive-rate

What is empty nest syndrome? Empty nest syndrome occurs when parents report the feelings of grief, a loss of purpose, and loneliness after their children move out. While empty nest syndrome isn’t classified as an official health condition, it’s well documented — and very common. It may take some time for parents to adjust to the new normal of no children in the home. For most people, these feelings pass over time as they learn to navigate their new lifestyle.  While entering the empty nest phase of life represents the closing of one chapter, it also ushers in the beginning of another — one with more time to focus on other parts of life, like relationships with partners and friends, hobbies and travel. It also offers an opportunity to get to know grown children as adults, which can be a very rewarding experience in itself. What are the symptoms of empty nest syndrome? While the experience is different for every parent, it’s common to have a variety of emotions during this time:  What is the average age of empty nesters? The average age of empty nesters is typically late 40s to 60s. Unsurprisingly, downsizing homes or moving to a new destination are common real estate activities for people who are no longer actively raising children. Collectively, people in this age range make up 40% of home buyers and sellers, according to the What are the main characteristics of empty nesters? There are over 22 million so-called ‘empty nesters’ in the United States. Many still work full time and often find themselves in a time of financial transition. Some may no longer be financially responsible for the everyday expenses of their children — things like food, clothing and activities — and may find themselves with more disposable income. Others may be responsible  for college tuition, housing, and food while others may be managing increased taxes if they no longer have dependents to claim. What are some tips for empty nesters to make most of this stage of life? Once the dust has settled on the initial transition, usually after two to three months, you may find yourself ready to dive into a new routine. Here are a few tips for transitioning into and enjoying the empty nest stage of life. 1. Practice self care Dedicate time to a new self-care routine. With a newly open calendar, shortened to-do list, and new emotions, now is the time to focus on taking care of your physical and emotional needs. Exercise, sleep, 2. Invest in yourself You likely spent many years prioritizing your kids’ needs over your own, with their activities dominating the family calendar. Once the kids have flown the nest, you might find yourself with more free time than you’re used to. This is the perfect opportunity to 3. Connect with friends An abundance of free time means you can now expand your social horizons. You may want to reconnect with old friends you’ve lost touch with over the years, or seek out new relationships for this new era. Volunteer activities, affinity groups, and community organizations can be great places to find new friends who may be in the same season of life. 4. Get to know your kids as adults Your kids may not be little anymore, but part of the beauty of watching them grow up is the opportunity to know them as adults. This transitional period offers the chance to redefine your relationship and establish new roles and communication norms. 5. Reconnect with your partner In dual-parent families, it’s easy to slip into a routine where your daily and weekly routines revolve around caring for your children. Once your kids move out, it’s an ideal time to rediscover your partner and focus on spending quality time together. Consider 6. Talk to a professional This can be a hard transition for many. If your empty nest syndrome seems to last longer than expected or seriously affects your day-to-day life, it may be time to seek out a therapist or counselor. As an objective third party, a therapist or counselor can provide coping strategies and connect you with helpful resources. 7. Find a change of scenery When the kids have flown the nest, many empty nesters decide it’s the right time to reconsider their living situation. This might include downsizing the family home, renovating or What are some hobbies for empty nesters? Having an empty nest is the perfect opportunity to Why should empty nesters co-own a second home? Co-owning a second home is an ideal next step that fits seamlessly into many house plans for empty nesters ready to embrace freedom and flexibility. Shared ownership provides a practical way to enjoy a luxury vacation home without the full-time responsibilities of maintenance or management. If a second home is on your empty nester bucket list, Pacaso makes it easy to turn that dream into reality with a portfolio of

What does "property ownership" entail? Property ownership goes beyond merely acquiring real estate and registering it under one's name. It encompasses various forms and structures, each with its unique practical, financial and legal implications. Depending on the chosen type of ownership, individuals may encounter different estate planning challenges and tax liabilities. It's essential to understand these nuances, as they can significantly impact future events, including inheritance or tax assessments. Keep in mind that these are just suggestions, and your situation might call for something else. If you’re unsure which property type will work best, explore your options with a real estate attorney. 1. Sole ownership Type of owner: individuals As the name implies, sole ownership is when an individual is the only property owner. Since they are the only owner, they don’t require anyone’s consent to sell, lease or transfer the property to another person. Property owned by a sole owner is sent into probate when the owner dies until the will is validated. 2. Joint tenancy with rights of survivorship (JTWROS) Type of owner: married couples The most common form of property ownership for married couples is joint tenancy with rights of survivorship, which awards both parties undivided ownership. Both parties have equal liability and financial responsibility for the property, including the cost of upkeep and repairs, as well as equal rights to access the property. In JTWROS, one owner may sell or transfer their portion of the property without the consent of the other owner.  3. Tenants by the entirety (TBE) Type of owner: married couples Married couples may instead opt to own property as tenants by the entirety, which is the same as JTWROS, except an owner can do nothing with their ownership portion without consent from their spouse, since the couple is legally considered one entity. Divorce will automatically change the ownership agreement to tenants in common. 4. Community property Type of owner: married couples Only 10 U.S. states are community property states. This real estate ownership type classifies any property obtained by a spouse during marriage as “community property” — that is, owned by both spouses, even if the property is only listed in the name of one spouse. This includes all real estate purchases made during the marriage.  The states that recognize community property include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In Alaska, residents can opt in to a community property agreement. The same community property laws apply to registered domestic partnerships in California, Nevada and Washington. 5. Owning trust Type of owner: minor children or adult with disabilities An owning trust entrusts the care and management of a property to a trustee acting on behalf of someone else, usually a child or an adult with special needs. A living trust is established while the original owner (also called a trustor or grantor) is still alive. The trustor names the beneficiary as the owner of the property, but until the trustor’s death, they also serve as the trustee. The property remains in the beneficiary’s name, but a new trustee is selected (usually named by the trust) to keep the property out of probate. 6. Tenancy in common (TIC) Type of owner: unrelated multiple owners of a single property When owning property as a Each tenant is allowed to sell, will or otherwise transfer their ownership share without the permission of the other owners since they lack survivorship rights. When a tenant dies, their ownership passes into probate before being transferred to any named heirs. 7. Owning partnership/LLC or co-ownership Type of owner: unrelated multiple owners of a single property Properties can be organized into a Owners can create the LLC by What’s right for you? Different types of ownership in real estate can offer different benefits to owners. If you’re still not sure which type of real estate ownership is right for you and your situation, it’s a good idea to consult a legal professional.  How to become a co-owner of a second home Pacaso makes it possible for individuals to become co-owners of a In Pacaso’s ownership model, an LLC ensures true property ownership for each member. Unlike a timeshare when you only pay for time to use a property, Pacaso ensures you enjoy the many benefits of second home ownership

When you think about owning a second home, co-ownership is a great way to lower costs and increase access to potential properties. There are a wide variety of co-ownership structures to choose from, each with distinct advantages and disadvantages. Let’s break it down. The common structures for co-ownership include: limited liability companies (LLCs), Pacaso has modernized LLC co-ownership, improving on the proven model to maximize the positives. Offering owners increased protection, Want to learn more about the benefits of The basics A limited liability company (LLC) is a legal business entity composed of individual members that acts to protect its owners from personal liability. Multiple-member LLCs, like those created by Pacaso, are a unified front that represent and protect a group of buyers. A blend of partnership and corporation, LLCs have their own bank account, tax ID number and assets, conducting real estate investment and transactions under their own name, and transforming the way buyers purchase and own a second home.  The beauty of LLC property ownership comes from its simplicity. Whether the entity is made up of two members or many, the LLC pays for real estate purchases using its own funds, making it crystal clear where the ownership lies. With Pacaso, buyers purchase owner membership interests in a property-specific LLC.  Financing a LLC property is simple. Buyers can use a The top advantages of LLCs include: The cons The Pacaso solution Navigating the ins and outs of property ownership can be a complicated process, but Pacaso is here to help: Pacaso helps you leverage all the benefits of LLC property co-ownership of fully managed second homes. It’s true ownership with less expense and stress, and all the joy.   (As with all major investments, it’s smart to consult your certified public accountant.)

Maybe you want to achieve your dream of For many, the most challenging part of purchasing a second home is finding the time to make it happen, especially when juggling the demands of a busy life. It's not just about the hours spent house hunting — it also includes the effort involved in securing financing, managing paperwork, and potentially overseeing renovations. The following nine strategies can help streamline the process and make your dream of a second home a reality, and the best one for you depends on what you plan to do with your first home. Option 1. Get approved for another mortgage Perhaps the simplest and most familiar strategy for how to buy a house when you own a house is to apply for a new mortgage. In this strategy, a bank approves you to hold two separate mortgages simultaneously. You’ll need to have enough cash on hand to cover a down payment and the closing costs for the new mortgage. Option 2. Become a landlord Similar to getting approved for two mortgages, as a landlord you are still responsible for two monthly mortgage payments, but the rental income can help cover your payments.  If you plan to rent out your second home, read your mortgage agreement carefully. Some mortgage agreements prohibit you from renting it out or require you to get the lender’s permission.  Once you’ve confirmed you can rent out your home, get it appraised to determine how much to charge for rent. The amount you charge should cover your monthly mortgage payment on the property. Your lender may also require you to have at least 2% of the mortgage value in investments, cash, etc., to cover the mortgage if you cannot get a tenant. Option 3. Take out a bridge loan A bridge loan is a temporary loan (usually six months to a year) intended to cover the cost of purchasing a new home while waiting for your current home to sell. Also called a swing loan, a bridge loan can finance up to 80% of the value of both your new and current home. When your current home sells, you use the profits to pay back the entirety of the bridge loan and apply for a traditional mortgage for your new home. Option 4. Borrow from your investments Generally, you cannot withdraw from your retirement investments without paying a penalty (usually 10%) and potentially taxes on the amount you withdraw. However, you may be able to You must repay the loan with interest within five years. Some employers may also prohibit you from contributing to your account while repaying a loan. If you have a Roth 401(k), you can withdraw any contributions from your retirement account without penalty. If you borrow any earnings that your contributions accrued, however, you will have to pay a 10% early withdrawal penalty. Option 5. Get a home equity loan A home equity line of credit allows you to borrow against the equity in your home, but it’s not a full balance loan like a home equity loan. Instead, it’s a line of credit you can draw from over time, like a credit card limit. If you have enough equity in your home, you can use your HELOC to cover the entire Option 7. Raise a down payment with a cash-out refinance With a cash-out refinance, you refinance the entire value of your home up to 80% of its equity. Whatever you don’t owe on the mortgage, you’ll receive in cash. For example, if you have $100,000 left on your mortgage but the home has $500,000 in equity, you’d be able to refinance up to $400,000. You would walk away with $300,000 in cash to put toward the purchase of your second home. Option 8. Consider a reverse mortgage If you are 62 or older, you may qualify for a reverse mortgage. Also known as a home equity conversion mortgage (HECM), a reverse mortgage allows you to borrow from your home’s equity without making monthly payments — with the expectation that you will pay back the loan when you sell your home.  Option 9. Explore other types of ownership There are other Get the best of both worlds with co-ownership For those dreaming of that perfect vacation retreat,

A You might consider Understanding second homes vs. primary residences Although you might visit a second home for weeks on end, it’s only a personal residence for part of the year. It may be vacant or rented out to others the rest of the time. By contrast, lenders expect your primary residence to take priority because it’s where you live and sleep. You can also own more than one “second” home; a second home is a property Can you have two primary residences? Generally, no, you can't have two primary residences at the same time for tax or mortgage purposes. Even if you split your time between a couple of places, only one can be your official "main" home. This is where you spend most of your time, get your mail, register your car and list on official documents. Lenders offer better interest rates on primary residences because they assume you'll always prioritize paying the mortgage on the home where you actually live. Can a second home be a primary residence? In short, no. Why does occupancy status matter? Your occupancy status matters significantly because it directly influences your financing options, interest rates and how lenders assess risk. Lenders carefully consider how you plan to use a property, as this dictates your financing options. Your primary residence, where you live and sleep, is generally easier to get a mortgage for and typically comes with lower interest rates. Lenders see these loans as less risky, understanding you're highly motivated to keep the roof over your head. It’s crucial to be truthful about your intended use when applying for a mortgage, as misrepresenting your occupancy can lead to serious consequences, including your lender demanding immediate full repayment, additional penalties and even bank fraud charges. You can also own more than one "second" home, as it's defined simply as a property secondary to your primary residence. Can you convert a second home into your primary residence? It's worth noting that a property's occupancy status isn't necessarily permanent; you can change a secondary residence into a primary one if it meets the necessary criteria. For instance, a retired couple might choose to downsize and sell their primary home to make their long-time second home their new primary residence.  Since your property's occupancy type directly impacts the specifics of your financing, it's always wise to consult your mortgage lender before making any such changes. Understanding the difference between a primary residence and a second home is important. Knowing the difference helps plan your long-term financial planning, property management responsibilities and even lifestyle choices.  For those seeking a luxury second home without the hassle and expense, let Pacaso make it simple with

If your dream is to We’ll share the top seven financing differences between investment properties and second homes to better understand both options. Plus, we’ll cover the tax considerations that may affect the type of second home you choose. What is a second home? A second home is a dwelling you own in addition to your Note that the way lenders classify second homes, vacation homes and investment properties can vary. What is an investment property? An investment property is an asset you buy with the intention of generating income through rent or value appreciation. A Are you considering buying a house to use as a second home and investment property? Although possible, you may need to choose a primary intent for your purchase to satisfy financing and tax regulations. 7 second home vs investment property financing differences When it comes to financing, investment property and second home requirements can differ greatly. Here’s an overview of how each To better understand how to begin financing investment property and 1. Mortgage interest rates Even with the same amount of money down and the same home loan length, a mortgage for an investment property will almost always carry a higher mortgage interest rate than a loan for a second home.  2. Down payments According to the 3. Debt-to-income (DTI) ratio According to 4. Closing costs Lenders often charge higher origination fees (or closing costs) for investment properties than for second homes.  5. Income reporting Because an investment property can earn you additional income through rental or resale, mortgage lenders will often include potential future profits when calculating your DTI for a rental property. You won’t have that perk with 6. Number of units For a second home, you are only allowed a mortgage on a single-unit property. For an investment property or rental property, you can get a mortgage on a property of up to four units.  7. Cash reserves A mortgage for a second home will require you to have a minimum of two months of cash reserves on hand. For an investment property, you will need a minimum of six months’ cash reserves.  Tax considerations Aside from having a firm grasp on investment property and second home mortgage rules, it’s important to understand the tax implications of both options. It’s also smart to consult with your tax adviser. Let’s break down the tax considerations.  1. Mortgage interest While mortgage interest on a second home is often deductible for personal use, it can also be claimed as a business expense for an investment property, potentially providing 2. Property taxes You can potentially deduct the property 3. Rental income Income you earn from your 4. Home equity loan interest Interest on a home equity loan for a second home may be deductible. In contrast, interest on a home equity loan for an investment property is generally deductible as a business expense. Now that you’re aware of the major differences between a second home vs. an investment property, it’s time to decide which option best suits your needs. If you decide that