Since I know all of you are dying to know such things, I’ve spent the day delving into the reasoning for lenders to require 20 percent down payment on second and vacation homes.
In short, it’s all about the mortgage insurance.
The less you put down on a property, the higher the risk of default. If you’re not able to put at least 20 percent down, lenders require mortgage insurance to help protect them in case of a default.
As recently as the start of the year, mortgage insurance companies were offering P.M.I. (as mortgage insurance is known more commonly) on second and vacation homes. That changed at the end of the first quarter as losses mounted and these second residences became higher default risks – you can read more in this article from the New York Times from the end of February.
For those who have made it this far and actually read the Times piece, a word of caution about this sentence:
Because the recent changes are not consistent from one company to the next, borrowers in need of P.M.I. are unlikely to be shut out completely.
That was the case in February. Not so much now. In fact, I’ve been on the phone with multiple lenders who have been checking with everyone they know and the answer is universal – you can’t finance a second home with less than 20 percent down.
Having said that, no rarely remains universal and never doesn’t exist. Much like financing for Canadian buyers, which all but evaporated at the beginning of April but exists now in at least one local lender (if there are others outside BBVA Compass, drop me a line), it’s quite possible that one mortgage insurance company or another will change their policy when they decide the possibility for profit outweighs the risk.
After all, if there is any universal truth in this entire business (and life in general), it is that people do what they do. Real estate agents sell homes (at least some of us.) Builders build. Lenders lend. Mortgage insurers insure mortgages.
Just because it isn’t happening now doesn’t mean that can’t change at the drop of a hat.[tags]Phoenix real estate[/tags]