mortgage

Help for second-home owners

Highlights
  • A refinance might be available under the recent government plan. 
  • It's easier to negotiate a short sale on a primary home.
  • Some lenders are agreeing to modifications.

When we overindulged in real estate earlier this decade, we took generous helpings of seconds.

Now the problem for many with too much debt on their plate is how to deal with the mortgage on a second home.

Just two years ago, 12 percent of all residential sales were vacation homes and 21 percent of transactions were for investment properties, according to the National Association of Realtors. 

Options for second-home owners
  • Refinancing
  • Selling short
  • Working out a modification
  • Declaring bankruptcy
When buyers purchase a home that's not their primary residence and ask lenders to qualify them based on expected rental receipts, it's counted as an investment property. If, though, borrowers plan to pay the mortgage out of their own pocket and use the property for their own enjoyment, it's a vacation home.

Government-sponsored foreclosure rescue programs are aimed at saving primary homes. Indeed it's those who are in danger of losing the one and only roof over their heads who are in the direst need.

However, there is some dispute about whether or not the recently announced government effort allows owners of bona fide vacation homes and some types of rental units to seek a refinance.

Here is a look at strategies which may help owners strapped with a double dose of housing debt.

Refinancing

In this period of ultralow mortgage rates, all homeowners should examine the possible benefits of refinancing, says Doug Rice, a Castro Valley, Calif., investment adviser.

But even if a refinance shaves several hundred dollars off the monthly mortgage, the expense of a second home simply isn't affordable for owners who've seen their income drop, says Milo Benningfield, a San Francisco financial adviser. Instead of pursuing a refinance, they may be better served by trying to sell first, even if it means trying to arrange a short sale (see below).

Moreover, in places where home prices have taken a deep dive, refinancing may not be feasible. In Florida, for instance, lending companies typically won't offer a refinance loan for more than 80 percent of the current value of a second home or investment property, says Jerry Collyer, president of the Florida Mortgage Professionals Association.

That leaves owners who owe, say, $200,000 on a condo now worth $170,000 without the ability to refinance.

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The exception, however, is if vacation homeowners need a new mortgage and their current first mortgage totals no more than 105 percent of the current appraised value. If Fannie Mae or Freddie Mac hold the loan on the home a refinance might be available under the recent government plan

Selling short

When a realistic sales price is less than the mortgage amount, owners have to convince their lending company to accept sale proceeds, even though they fall "short" of what's owed.

 

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