It is that time of year, when the weather is great and the benefits of owning a cabin or cottage of your own is that much more appealing. Though before you go cabin shopping, let’s chat about mortgage financing as it’s a little different than getting a mortgage for your primary residence. These types of properties have been affected by the mortgage insurance rule changes so now is a great time to review the basics of financing a vacation property or second home.
Depending on the lender, these types of properties can be referred to as vacation homes, second or secondary homes or recreational properties. While the term might be different, they are all used to describe a property that is not your primary residence and not a rental property, it’s somewhere in between. If you’re buying a cabin or a cottage, a home for a family member to live in or a second home to live in while working away from your primary residence, they all fit into this middle area. The best way to determine what type of property you’re trying to finance is to speak to a mortgage professional and they will determine how a lender will define your property for financing purposes and what polices and guidelines your application will be reviewed under.
The lender will require you to show you can qualify to purchase a second property while still owning your principal residence and to do this they will be analyzing your credit application to determine if you can carry 2 mortgages with a low likelihood of default. You will be asked to provide property details, income documents and downpayment confirmation. If you’re self-employed and trying to buy a second home under a stated-income program, be prepared to provide a larger downpayment. Co-signers are also not always considered unless they will be using the property as well. If that’s the case, they will be expected to qualify along with the main borrower, meaning all other debts of all the borrowers are included in meeting the qualifying guidelines. Mortgage qualifying is one of those grey areas where it’s best to contact an experienced professional to get a straight answer on whether you can get approved for a second home or not.
The minimum downpayment to buy a second home is still 5% of the purchase price, providing you have verifiable income, downpayment from your own resources and a strong credit history. If you’re trying to buy with the minimum downpayment you will need to obtain mortgage default insurance through either Genworth or Canada Guaranty. If you’re dealing with a lender that only works with CMHC for insurance, you will require at least 20% minimum downpayment. The higher minimum is the result of the CMHC mortgage insurance rule changes that came into effect on May 30th of 2014. When you’re putting down a larger amount, there are more allowances for the source of the funds so do speak with a mortgage professional to locate a lender whose guidelines align with your borrowing profile to find a financing match.
When it comes to supporting documents relating to income and credit, the requirements are the same as if you were getting a mortgage on your primary residence. Without going into too much detail; they will be looking for paperwork to prove your income or self-employment status, a credit pull will usually satisfy the repayment history requirements and downpayment documents will vary depending on where you’re getting the funds from. The documentation differences are noticeable when confirming property details. Your potential lender will be looking to confirm the usual details like condition and location of the property, though they may also require proof the property has year-round access and service hook-ups or if a water potability test is required due to the property being on well water. Depending on how those results look, your mortgage professional will work to find a lender who likes the property as much as you do. If they’re not super keen on the home, they will be looking for added strength from the borrower to support the application for mortgage approval.
To recap, purchasing a recreational property is a lot like getting a mortgage for your primary residence in that you can usually get best rates and the qualifying process is quite similar other than some extra property requirements. Just as you did your research before you bought your first home, the same due diligence should be used when buying a vacation property or second home.