Before you go cottage shopping, let’s chat about the 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 too, so now is a great time to review the basics of financing a vacation property or a second home.
Depending on the lender, these types of properties can be referred to as vacation homes, second or secondary homes, and 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 cottage, a home for a family member to live in, or a second home for you to live in while working away from home, 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 view the property you want to buy for financing purposes and what polices and guidelines your application will be reviewed under.
The lender will request that you show you can qualify to purchase a second property while still owning your principal residence. They will be analyzing your credit application as they did when you purchased your residence 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 are self-employed and trying to buy a second home under a stated-income program, be prepared to make 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 debts of all of 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, before spending time looking for property.
The minimum downpayment required to buy a second home is 5% of the purchase price, providing you have verifiable income, downpayment from your own resources and a strong credit history. If you are planning on buying with the minimum down you will need to obtain mortgage default insurance through either Genworth or Canada Guaranty. This type of insurance comes with a significant cost that can be added to the new mortgage. If you have applied to a lender that only works with CMHC for insurance, you will require at least a 20% minimum downpayment. The reason is the higher minimum is the result of the CMHC mortgage insurance rule changes that came into effect in May 2015. Do be advised if you are able to put down a larger amount, there are more allowances for the source of the downpayment funds. Speak to your mortgage professional to ensure you are working with a lender who has guidelines that 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 for 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 report that the lender will order will usually satisfy the repayment history requirements, and downpayment documents will vary depending on where you are getting the funds from.
The documentation requirement differences are noticeable when confirming the property details. Your potential lender will be looking to confirm the property is in good condition with rear-round access. If the property is a cabin, a full appraisal will likely be required to confirm the home is fully serviced and that it fits under the lenders allowable location areas. If the water source is a well, a satisfactory water potability test will be required which could take at least a couple of weeks to get results from the local municipality who performs the test. 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 the lender is not too keen on the home for some reason, they will be looking for added strength from the borrower to support the application for mortgage approval.
The bottom line
Purchasing a recreational property is a lot like getting a mortgage on 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.
For all your mortgage needs, contact Jackie at firstname.lastname@example.org or 780-433-8412. Stay in the loop by following on Twitter @mortgagegirlca.