Purchasing a second home can be an excellent choice—you make a stable investment in real estate, you permanently secure lodgings for vacations or weekend trips, and you always have another place to stay if your home needs repairs.
But unless you can afford to buy the home outright, you’ll need financing. In that case, what is the debt-to-income ratio for a second home mortgage application that lenders want to see?
In this article, we’ll explore debt-to-income ratios for a second home buyer, the maximum ratios a lender allows, how to determine your ratio, and additional funding options.
What is the Maximum DTI Ratio for a Second Home?
While a mortgage lender’s DTI ratio criteria can vary, they generally require borrowers to have a ratio of 43% or less.
But, are you really likely to find that high of a DTI maximum at most lenders? No. Let us explain.
Debt-to-income ratio (DTI) has two crucial components:
- The front-end ratio, which describes your monthly housing costs vs. your monthly income
- The back-end ratio, or the amount of money you spend paying off your non-housing debts each month vs. your gross monthly income
For second home financing, lenders use a slightly different formula—they calculate how much you’re spending on monthly debt payments and the monthly cost of your existing housing costs (including your mortgage payment, property taxes, homeowners or mortgage insurance, and PMI) to determine how much monthly income you’ll have leftover to spend paying for another real estate or a second property.
For a second home purchase, most lenders want to see a DTI of 36% or less, but some will increase their maximum up to 43%. Why? In order to issue Qualified Mortgages (QMs), US-based lenders must do their due diligence to ensure that their borrowers won’t place themselves in financial peril by taking on a home loan they can’t afford—especially for an unnecessary expense like a second home.
DTI in Second Mortgages
It behooves lenders to approve mortgages for people with a low DTI—why?
- Low DTI borrowers are more creditworthy. They have the money to pay off their debts and then some, so they’re more likely to continue making payments in the event of income changes like a layoff, pay reduction, or retirement.
- Low DTI borrowers appear more financially responsible. The less debt you have, the more easily you can afford your past expenses.
- Low DTI borrowers present a lower risk to lenders. The more money and less debt you have, the higher likelihood of 100% repayment.
In all likelihood, if you can’t reach a low enough DTI for second mortgage approval, lenders will conclude that you have higher debt repayment priorities than a second home. So, if you are wondering, “can I refinance with a high debt-to-income ratio,” it is possible. However, it will depend on the type of loan you pursue.
How to Determine DTI Ratio for a Second Home
When determining your DTI for a second home mortgage, use the following formula:
Monthly housing costs + monthly debt obligations (like student loan, medical bills, or credit card payments) / gross monthly income = DTI
While mortgage lenders for primary residence don’t usually include housing costs in their back-end DTI calculations, your first mortgage is considered a monthly financial obligation when pursuing a second mortgage. If you find it difficult to add another obligation, there are high debt-to-income ratio mortgage options available.
Alternative Loan Options for a High DTI
When determining whether or not it’s the right time to buy a vacation home, it’s not just about debt repayment. Before scouring the market for a beach house, consider whether you’ll still be able to afford essential items if you have a second mortgage, like:
- Cleaning and hygiene supplies
- Medications and health insurance premiums
- Utility, internet, and cell phone bills
If you can’t afford these things while paying all of your debts and putting at least some money towards your savings each month, you simply can’t afford a second home.
However, the fact that you can meet your basic needs and financial obligations doesn’t mean your financial institution will approve your application for a second mortgage.
In some cases, you might be approved for a mortgage loan only to realize that the financial burdens leave you without enough cash to meet life goals like paying for education or starting your own business.
The good news? You have other options. These include:
- Applying for a home equity loan for debt consolidation
- Negotiating a settlement for your credit card or medical debt
- Selling your first home and using the proceeds for debt repayment
- Converting your home equity into cash with a sale-leaseback
Conquering High DTI and Meeting Your Financial Goals
If you have a high debt-to-income ratio for a second home buyer, but that cute beach cottage is calling your name, accessing your home’s equity is an excellent way to meet both of your financial goals—paying off debts and investing in real estate.
Sale-leaseback programs can making equity conversion easier than ever, especially for those confronting a high DTI. They allow homeowners a way to convert to their hard-earned equity into cash while keeping them in the primary residences they love.
Your debt-to-income ratio for a second home buyer has a huge impact on your mortgage application getting approved. Once you’ve learned more about what’s accepted by lenders for a mortgage on a second home, if you find that you still aren’t able to qualify, there are plenty of alternative financial solutions like sale-leasebacks that you should consider. Consult a financial advisor to learn about what options make the most sense for you and your family.
- Forbes. What is My Debt to Income Ratio?https://www.forbes.com/advisor/mortgages/what-is-my-debt-to-income-ratio/
- Rocket Mortgage. Buying a Second Home: A How-To Guide. https://www.rocketmortgage.com/learn/buying-a-second-home