So you’ve gotten to that point in your life where you are finally thinking about buying that dream lake house you’ve always wanted. While it may be more fun to start thinking about lakefront living and the boat you’re going to buy or the canoes you’re going to purchase, let’s take a step back and talk about some of the things to consider before pulling the trigger on your Tennessee lake home.
Decide how you will use the home
Before estimating your Tennessee lake house purchase costs, you need to consider how you intend to own and use the property. Your lake house is probably going to fall into one of these categories:
- Primary residence. If you plan to move into your lake house and live there for most of the year, that makes it your primary residence.
- Second home. If you only plan to live there for part of the year while maintaining your primary residence, then it’s a second home. You can use your lake house with your family and friends, but some lenders won’t let you rent the home.
- Investment property. You’d rent the home, plus use it when it’s not rented. Rates are higher than primary residence or second home rates, and down payment requirements typically start at 30 percent. But you can use rental income to help qualify for the mortgage.
Whichever route you take, the first step is the same: Get pre-approved for a mortgage. This will enable you to start shopping for homes within your price range and make an offer on a home.
Understand the total cost of owning a lake house
You can determine your own budget and what is realistic to you then find a lender and have them dive deeper into:
- Cash available for down payment, closing costs, and reserves.
- Total monthly cost of your existing home, plus the total monthly cost of the lake house (including principal, interest, taxes and insurance for both homes).
- Total cost to manage the lake house, including costs unique to a lake house. One such cost is flood insurance, which is an additional insurance fee on top of your normal homeowners insurance.
You also need to consider budget items that lenders don’t use in their qualifying calculations, but that are still very important for your own financial planning:
- Total cost for gas, electric, cable TV, and internet.
- Total cost for furniture and housewares. This is especially important for your budget if it’s a second home or investment property.
- Total costs to travel to your lake house for your desired number of visits each year (if it’s not a primary residence).
- Total cost of outdoor gear: kayaks, paddle boards, boats, jet skis, etc.
- Total cost of property maintenance including dock upkeep, cleaning, and landscaping.
So whether you’re looking to purchase this second home as investment property, or as that long-sought-after Tennessee lake house, there are several things to keep in mind before approaching a lender about that home mortgage.
Second Home Mortgage Options
But why is lakefront different? Well…again, many of these homes are secondary residences, and when it comes to secondary homes, there are a few more factors that go into down payments and building equity.
First off, don’t let the term “second home mortgage” scare you. While it may seem daunting to take on a second home loan, there are many mortgage loan programs out there that will allow you to purchase your dream lakefront property. Qualifying for a mortgage to buy that Tennessee lake house can be a bit more involved than when purchasing your first home because you must show the ability to carry both your primary home’s mortgage (if you have one) and the new mortgage. From an underwriting standpoint, second homes are more risky than primary residences.
Down payments: You will need to come up with a substantial down payment — one that is likely higher than when you purchased your first home. This can be anywhere from 10% to 35%, depending upon the lender. Simply put, your first investment into a lake home is your starting equity, so when buying a property, the larger your down payment, the more equity you’re starting out with. Generally Speaking…The more your put down, the better the mortgage terms will be. A larger down payment may result in better terms and a lower monthly payment. According to Zillow’s 2017 Consumer Housing Trends Report, only a quarter of buyers pay 20 percent of their home’s price upfront.
Credit: You will need to meet credit standards — which in this case may be higher than when you bought your first house. Lenders typically require a higher credit score for loans on second homes. Some reports suggest you will need a credit score of 725 to 750 to qualify. If you’re purchasing the property as a second home, you may need a higher credit score to qualify for a mortgage, and you might receive a higher interest rate due to the increased risk for the lender.
Debt-to-income: You will need to figure out whether your debt-to-income ratio is good enough to earn that second home mortgage. Expect lenders to put your debt-to-income ratio under closer scrutiny for your second mortgage than your first home. The lower your debt-to-income ratio is, the greater your chance is at getting that mortgage for your second home.
Find an Experienced Real Estate Agent
Purchasing a lake house is different from purchasing a regular home in many ways, which is why it’s so important to work with someone who knows what to expect and what to look out for. Be sure to find someone who specializes in lakefront properties. This is especially important if you’re new to lake living and aren’t aware of the typical pitfalls that can come with owning a lakefront home. An experienced agent will know what questions to ask about the homes you view and what you need to find out about a home you’re considering before you make an offer.
Likewise, for destination property areas, a local lender will be comfortable with nuances like appraisals and waterfront lending.
Post by Kody Millikan, Lakefront Living, On The Lake Realty