Second Home Mortgage Requirements and Rates for 2023

What to know about second home mortgages

A second home can be an excellent investment.

It can give you a place to vacation while avoiding pricey lodging, and it can also generate cash flow. If you rent your vacation home out and use rental income to cover the mortgage, the home could potentially pay for itself.

Before you jump in, though, you should understand the rules and requirements for a second home mortgage. They’re a little different from the mortgage on your main home. Here’s what you need to know.

In this article (Skip to…)

• Second home loans
• Requirements
• Second home mortgage rates
• FHA and VA loans
• How to buy a second home
• Alternatives
• FAQ

What is a second home mortgage?

A second home mortgage is a type of loan specifically designed to help finance a secondary or vacation residence.

It’s distinct from the loans used for primary residences or investment properties due to the unique risk profile it presents to lenders. This is mainly because you are not relying on your second home for everyday living. This scenario allows lenders to assume that, in financial difficulties, you may prioritize other payments over your second home mortgage.

To qualify for a second home mortgage, the property needs to adhere to several guidelines.

• It should be a single-unit dwelling that’s suitable for use throughout the year, even if you only plan to occupy it seasonally
• You must hold exclusive rights to the property, excluding any long-term leasing or timeshare arrangements
• The second home should not be managed by a property management company
• It usually needs to be a certain distance away from your primary residence

An interesting aspect of second home mortgages is that you might be able to rent the property out when it’s not in use. However, rental periods are typically limited to 180 days annually, and the potential rental income cannot be factored into your mortgage qualification criteria.

Qualifying for a second home mortgage

It’s common to get a mortgage for a second home. Over half of all second home buyers use a mortgage rather than paying cash. But financing a second home or vacation home comes with different rules than financing a primary residence.

Before applying for a vacation home loan, you should know that:

• You’ll likely need at least two months of cash reserves
• You’ll need to put at least 10% down
• Credit score requirements are higher than for a primary residence
• Interest rates are slightly higher than for a primary residence
• You could potentially use rental income to help cover your mortgage payments

Perhaps most importantly, you must live in your vacation home for at least part of the year. Otherwise, it counts as an investment property — not a second home — and you’ll have to meet different mortgage requirements.

Second home mortgage requirements

Second home mortgage requirements are a bit stricter than primary home loans. Fannie Mae and Freddie Mac — the two agencies that set conforming loan guidelines — have requirements for both the borrower and the home being purchased.

• Borrower: Must meet required minimums for down payment and credit score, and not exceed maximum debt-to-income ratio
• Property: Must be a one-unit single-family residence, suitable for year-round use, owned by the borrower
• Residency: Occupied by the owner for a portion of each year and not rented full-time
• Down payment: At least 10% down for borrowers with excellent credit. Higher for those with less-established credit
• Cash reserves: Between two to six months, depending on the buyer’s financial situation
• Credit score: Minimum credit score of 640, but potentially higher for those with smaller down payments and more debt
• Income: Varies depending on down payment and credit score, but debt-to-income ratio should generally not exceed 45%

We go into more detail about each of these second home mortgage requirements below. Here’s what you need to know about financing a vacation home.

1. Second home mortgage requirements for borrowers

The most important requirement for a second home loan is that you need at least a 10% down payment. This rule is non-negotiable.

Beyond the down payment rule, guidelines for second home mortgages can be flexible. Borrowers may be approved with:

• A credit score of 680 or higher (typical)
• A credit score of 640-679 (with a down payment of 25% or more)
• A debt-to-income ratio (DTI) of up to 45%

If one area of your application is weaker, you can often compensate by being strong in others. For example, if your credit score is right at 640, you may get approved by making a bigger down payment. Or, if you have a high debt-to-income ratio, you could make up for it with an excellent credit score and 12 months of cash reserves in the bank.

Thanks to this flexibility, it’s possible to qualify for a second home mortgage even without perfect credit or a big down payment.

2. Second home mortgage requirements for properties

In addition, the property itself needs to meet certain guidelines. It must be:

• Occupied by the owner for some portion of the year
• A one-unit home (not a duplex, triplex, or four-plex)
• Suitable for year-round use
• Owned solely by the buyer
• Not rented full-time or operated under a timeshare arrangement
• Not operated by a property management company that has control over occupancy

That first rule, which states you must occupy the home part-time, is the most important.

3. Residency requirements for second homes

You couldn’t finance a property using a second home mortgage and then rent it out full-time. You yourself need to stay there for part of the year. Why? Because if you plan to rent the home full time, it’s considered an investment property — not a second home. Investment property loans have higher interest rates and different loan requirements.

In addition, the home must be a reasonable distance away from the buyer’s primary residence. It also helps if the house is in a resort community or area. In short, the property must “feel” like a recreational residence, not a rental property posing as one.

4. Down payment requirements for a second home

You can buy a primary residence with just 3% down in many cases. But it takes a 10% down to buy a vacation home — and that’s if the rest of your application is very strong (high credit score, low debts, and so on).

If you have a lower credit score or higher debt-to-income ratio, your mortgage lender may require at least 20% down for a second home. A down payment of 25% or higher can make it easier to qualify for a conventional loan.

If you don’t have a lot of cash on hand, you may be able to borrow your down payment. You could do this using a cash-out refinance on your primary home or, alternatively, a home equity line of credit or HELOC.

5. Cash reserves needed for a vacation home purchase

When you buy a vacation property, you’ll probably need some cash reserves. Reserves are extra savings in the bank; funds you could use to pay your mortgage if you experienced a short-term interruption in income.

One month of reserves is equal to the amount of money it would take to make one monthly payment on both your primary residence and future second home. You’ll need at least two months of reserves if you’re a well-qualified wage earner, and at least six months of reserves if you’re self-employed or have any weak points in your finances.

If you have at least 12 months of cash reserves, you may be able to get away with a slightly lower credit score or higher debt-to-income ratio on your second home mortgage application.

6. Credit score needed to buy a second home

Credit score requirements are slightly higher for second homes than for primary residences. Fannie Mae sets its minimum FICO at 620 for primary home purchase loans. But a second home loan backed by Fannie Mae requires a minimum credit score of 640 — and that’s with a 25% down payment and DTI below 36%.

If you make a down payment of less than 25%, you typically need a credit score of at least 680 and low debts, or 720 with a higher debt-to-income ratio. Credit score requirements can also vary by lender. If you’re having trouble qualifying for a vacation home loan when you first apply, try shopping around for a lender with more lenient requirements.

7. Income required for a second home loan

Debt-to-income ratio requirements depend on the size of your down payment and your credit score. Fannie Mae allows a DTI up to 45% with a 660 FICO score and at least 25% down. A 45% DTI means your total monthly payments add up to 45% of your gross monthly income.

For example, if you make $10,000 per month before taxes, your total monthly debt payments could reach up to $4,500. That includes your primary mortgage payments, second mortgage payments, auto loans, and other ongoing debts.

Unlike investment properties, you cannot use future rental income to help you qualify for a vacation home. You have to qualify with income from sources other than the property you are purchasing. If you’re buying a multi-unit vacation home, lenders will almost always treat your purchase as an investment property, whether or not you plan to rent it out.

Second home mortgage rates

Second home loans have only slightly higher interest rates than first home mortgage loans. On average, you can expect your vacation home rate to be less than 0.50% higher than what you’d pay on a primary residence.

As with your main home, it pays to shop aggressively for your best mortgage rate. Compare offers from at least three to five different mortgage lenders, and remember to look at their fees and annual percentage rates (APR) as well as the quoted mortgage rates.

To make sure you qualify in the first place, take a look at your assets, credit, and income — like an underwriter will. You’ll have the best chance at a low second home mortgage rate if you pay down outstanding debts and get your credit score as high as possible ahead of time. A bigger down payment of 25% or more can help you get a lower rate, too.

Can you buy a second home with FHA loans or VA loans?

The U.S. government doesn’t sponsor loans for vacation homes since government-backed loans are meant to encourage single-family homeownership. However, if your seller already has a government-backed loan against the property, you may be able to assume the seller’s loan.

It’s also possible for veterans who qualify for VA loans to buy a new primary residence with a VA loan while converting an existing home into a second home. But the loan of choice for most buyers will be a conventional loan, such as those regulated by Fannie Mae and Freddie Mac.

How to buy a second home

Buying a second home is an exciting venture, yet it requires careful planning and strategic decision-making. It’s not just about picking out a beautiful vacation residence; it involves navigating financial considerations and comprehending the complexities of home financing.

To ensure a smooth path, it’s essential to understand the process involved. Let’s break down the home buying process into four pivotal steps:

• Get pre approved. The first step to buying a second home is to get pre approved for a mortgage loan. This involves a lender reviewing your financial health, including your income, debts, and credit score. Pre approval not only gives you a clear picture of how much you can afford but also positions you as a serious buyer in the competitive real estate market
• Go house hunting. After pre approval, the fun part begins - house hunting. Consider factors like location, property type, and suitability for year-round occupancy, as these play a key role in the kind of second home mortgage you may qualify for. It’s crucial to keep in mind that your desired property must meet specific requirements to be considered a second home
• Make an offer. Once you find a property that ticks all the right boxes, it’s time to make an offer. Your real estate agent can guide you through this process, helping you to make a competitive offer based on market trends and property values. Remember, it’s not uncommon for negotiations to occur before the seller accepts your offer
• Close on your second home. After your offer gets accepted, you’ll proceed to the closing process. This entails finalizing your mortgage agreement, paying the necessary closing costs, and signing all relevant loan origination paperwork. It’s during this stage that you’ll transition from prospective buyer to official homeowner

Understanding each step of the process makes buying a second home less scary and more rewarding.

Alternative ways to finance a second home

While a second home mortgage is a popular method of financing, it’s not the only option. If you’re a first-time buyer of a second home, or you have significant equity in your primary residence, you might consider the following alternatives.

Cash-out refinance

A cash-out refinance involves replacing your existing primary mortgage with a new one, while also borrowing more than you currently owe. This extra cash, released from the equity you’ve built up in your primary home, can then be used towards your second home.

While this can be a viable strategy, it’s important to note that this will increase your overall mortgage balance and potentially result in higher monthly payments.

Furthermore, refinancing usually resets the payoff timeline for your mortgage. If you opt for a new 30-year home loan, this could extend the period it takes to pay off your original mortgage.

Home equity loan

These are loans against the equity you’ve built up in your primary residence. Home equity loans can provide a lump sum of money that can be used for the down payment or even to cover the full cost of the second home. However, they typically come with higher interest rates than first mortgages.

With a home equity loan, your lender will use your first home as collateral. So you risk foreclosure of your home, should you be unable to repay the second mortgage.

HELOC

A home equity line of credit (HELOC) provides a flexible means to borrow against the equity of your primary residence. It functions similarly to a credit card; you have a specified credit limit and can borrow up to this amount. As you repay the borrowed sum, your credit line is replenished. This financing option offers a useful way to generate funds for your second home.

However, caution is advised. Like Home equity loans, HELOCs are secured against your primary residence. If you default on the repayments, your lender may have the power to foreclose on your home.

Second home vs. investment properties

Rental homes and vacation properties are financed differently. If you can qualify for your purchase without the property generating any income, buy it as a vacation home. You’ll get a better mortgage interest rate, and qualifying is more straightforward when rental income is off the table.

However, if you need to rent out your place to afford it, your purchase becomes an investment property rather than a second home.

In this case, your mortgage lender will want to see an appraisal with a comparable rental schedule. This document tells the underwriter the property’s potential income. The lender counts 75% of the anticipated rent as income to you, and the monthly mortgage, taxes, and insurance are added to your expenses when calculating your debt-to-income ratio (DTI).

Investment property mortgages often require at least 20% down because it’s very difficult to get mortgage insurance for these purchases. Investment property mortgage rates can be 50 basis points (0.5%) or higher than rates for primary residences.

Other second home expenses to consider

Owning a second home comes with extra responsibility. You’ll be maintaining two households, and that could cost more than you expect. So plan carefully.

Remember, affording a home is not the same as qualifying for a mortgage loan. Mortgage underwriters look at expenses for your principal, interest, property taxes, homeowners insurance, and, if applicable, HOA dues. If these expenditures check out, they approve your loan.

You must also consider travel costs, regular upkeep, repairs, utilities, furnishings, and household items. If the second home is far away, will you need to pay someone to maintain it for you?

You might be able to offset some or even all of these costs if you rent your home part-time. But second home mortgages require you to occupy the home for at least part of the year. You should be clear on the amount of time you’re actually allowed to rent out the property — if at all — before banking on rental income to cover your ongoing costs of owning the home.

FAQ: Second home mortgages and requirements

What are today’s second home mortgage rates?

Borrowers will pay slightly higher rates to finance a second home than they will for a primary residence. To make home buying even more affordable, shop around for rates with at least three mortgage lenders. You probably wouldn’t buy the first vacation home your real estate agent showed you. Loan shopping should work the same way.

Make sure your loan officer knows you’d like to finance your purchase as a vacation home and not an investment property. Get a quote for your vacation home purchase and be sure to shop around to get your best rate.

Don’t think you can qualify to buy a second home? You might be surprised.