Second Home Mortgage | Requirements & Guide 2024

Understanding second home mortgage requirements

Dreaming of owning a vacation retreat or a home away from home? Purchasing a second home can be a great way to create your personal getaway while building equity.

Not only does a second property offer a cozy retreat, but it can also generate income. Renting it out when you’re not using it could help cover your mortgage costs.

Before diving in, it’s crucial to understand the second home mortgage requirements, as they differ from those of your primary residence. Ready to explore the world of second home loans? Here’s what you need to know.

In this article (Skip to…)

• What is a second home mortgage?
• How to buy a second home
• Second home mortgage requirements
• Types of second home loans
• Second home mortgage rates
• Alternatives
• FAQ

What is a second home mortgage?

A second home mortgage is a loan used to finance the purchase of a secondary residence, such as a vacation home, that the borrower intends to occupy for part of the year.

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.

To qualify for a second home loan, the property must meet certain second home requirements. Understanding these guidelines is crucial for a smooth buying process.

• 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

How to buy a second home

Navigating the second home mortgage process may feel overwhelming, but with the right preparation, it can be seamless. Follow these steps to ensure you meet the second home loan requirements and secure the best financing for your vacation or second home.

1. Estimate your budget and loan amount

Before applying for a second home mortgage, determine a budget that includes the purchase price, down payment, and ongoing expenses. This will help you understand how much you can afford and guide your choice of second home loans. Be mindful of factors like closing costs and maintenance fees, and use a mortgage calculator to estimate your monthly payments.

2. Gather required documentation

Prepare the necessary documents for your second home mortgage application. Lenders will request proof of income, tax returns, bank statements, and details about your primary residence and any other real estate you own. Meeting the second home loan requirements early on will streamline your application.

3. Shop for the best mortgage rate

Different lenders offer varying rates and terms for second home mortgages, so take time to compare offers. You may want to consult with a mortgage broker to find competitive deals. Keep in mind that the second home mortgage requirements are often stricter than those for a primary residence, so ensure you’re choosing a lender that fits your financial profile.

4. Get pre-approved for a second home mortgage

Pre-approval can give you an advantage when searching for your second home, as it shows sellers you’re a serious buyer. It also provides a clearer picture of how much you can borrow. Getting pre-approved for a second home mortgage will help you move quickly when you find the right property.

5. Make an offer

Once you’ve found the perfect second home, work with your real estate agent to make a competitive offer. You’ll need to provide earnest money, which shows your commitment to the purchase. Make sure your agent guides you through this process to meet the second home loan requirements.

6. Finalize your loan application and close on your home

After your offer is accepted, work with your lender to finalize the details of your second home mortgage. At this point, you’ll lock in your interest rate and prepare for closing. By understanding the second home mortgage requirements and working closely with your lender, you’ll be well on your way to owning your second home.

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. Borrower requirements for second home mortgages

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

Beyond the down payment rule, second home mortgage requirements 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 second home mortgage requirement flexibility, it’s possible to qualify for a second home mortgage even without perfect credit or a big down payment.

2. Property requirements for second home mortgages

To qualify for a second home mortgage, the property itself must meet specific criteria set by lenders. These requirements ensure that the property is indeed a second home and not an investment property. The property must be:

• Owner-occupied: You must live in the property for a portion of the year, using it as a secondary residence. This is the most critical requirement for a second home mortgage.
• Single-unit: The property should be a one-unit home, such as a single-family house, condo, or townhouse. Multi-unit properties like duplexes, triplexes, or four-plexes do not qualify as second homes.
• Habitable year-round: The home must be suitable for year-round use, with adequate heating, cooling, and other essential amenities. Seasonal properties or those not built for continuous occupancy may not qualify.
• Solely owned: You must have complete ownership of the property. Timeshares or other shared ownership arrangements are not eligible for second home mortgages.
• Not rented full-time: While you can rent out your second home occasionally, it cannot be a full-time rental property. Lenders typically limit the number of days you can rent out your second home each year.
• Not professionally managed: The property should not be under the control of a property management company that dictates occupancy. You must have the freedom to use the property as you wish, subject to the lender’s occupancy requirements.

Understanding and meeting these second home mortgage requirements is essential to qualify for a second home mortgage and secure the best possible loan terms.

3. Residency requirements for second homes

You can’t finance a property using a second home mortgage and then rent it out full-time. To qualify for a second home mortgage, you must occupy the property for a portion 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, lenders typically require that the second home be located a certain distance away from your primary residence. Properties located too close to your main home may not qualify as a second home in the eyes of lenders. 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 a 20% down payment 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 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 likely need cash reserves, which are extra savings that could cover your mortgage payments in case of a short-term income disruption.

One month of reserves is equal to the amount needed 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 if you’re self-employed or have weaker financials.

Having 12 months of cash reserves may help you qualify for a second home mortgage 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 so shopping around may help you find more lenient requirements.

7. Income required for a second home loan

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

• 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 uses

Unlike your current home, a second home is not the dwelling you primarily live in, but it’s a property that you can use in various ways, either as a getaway spot, a secondary living space, or even as an additional stream of income.

When it comes to the function a second home can serve, the sky’s the limit, but generally speaking, they fall into three primary categories:

1. Vacation homes: This is perhaps the most popular reason people consider buying a second home. A vacation home serves as a retreat, a place to escape the everyday grind and enjoy some leisure time. Whether it’s a cabin in the woods, a beachfront condo, or a chalet in the mountains, a vacation home offers a getaway where you can relax and recharge.
2. Secondary residences: Sometimes, a second home serves a more practical purpose. It can be a dwelling near your workplace, reducing your daily commute and serving as a home-away-from-home during the workweek. Alternatively, it might be close to family members or in a location where you plan to eventually retire.
3. Investment properties: Renting out your second home as a short-term holiday rental can generate additional income without changing its classification. However, long-term rentals will reclassify your second home as an investment property, leading to different mortgage requirements and tax implications set by lenders and the IRS. To maintain your property’s status as a second home, limit rentals to short-term periods.

Second home mortgages vs. investment property loans

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.

Types of second home mortgage loans

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. When financing a second home purchase, borrowers have several mortgage options to choose from, including:

Fixed-rate mortgages (FRMs)

FRMs have an interest rate that remains constant throughout the life of the loan, providing predictable monthly mortgage payments. This stability makes budgeting easier for second home buyers.

Adjustable-rate mortgages (ARMs)

ARMs start with a lower interest rate than fixed-rate mortgages, but the rate can fluctuate over time based on market conditions. Adjustable-rate mortgages may be attractive to buyers who plan to sell their second home within a few years or who expect their income to increase significantly in the future.

Jumbo loans

Jumbo mortgages are designed for luxury second homes where the purchase price exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. These loan types often have stricter qualifying requirements and may have higher interest rates than conforming loans.

Interest-only mortgages

With an interest-only mortgage, borrowers pay only the interest portion of their mortgage payment for a set period, typically 5–10 years. This can result in lower monthly payments initially, but the payments will increase once the interest-only period ends and the loan principal must be repaid.

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.

Costs and fees associated with second home mortgages

In addition to the monthly second home mortgage payment, second home buyers should be prepared for the following costs:

Second home mortgage rates

Interest rates for second home mortgages are typically 0.25–0.50% higher than those for primary residence loans. 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.

Closing costs and down payment

Closing costs for second home purchases usually range from 2–5% of the loan amount and may include appraisal fees, title insurance, and origination charges. These costs are in addition to the down payment, which is typically 10–20% of the purchase price.

Private mortgage insurance (PMI)

Borrowers who put down less than 20% on a second home may be required to pay PMI, which protects the lender in case of default. PMI premiums are added to the monthly mortgage payment and can range from 0.5 to 1.5% of the loan amount annually.

Ongoing costs

In addition to the upfront costs of purchasing a second home, buyers should also budget for recurring expenses such as property taxes, homeowners insurance, HOA fees, utilities (electricity, water, gas, and internet/cable), and maintenance costs (landscaping, cleaning, and repairs). These expenses can add hundreds or even thousands of dollars to your monthly budget, so it’s crucial to factor them into your long-term financial planning to ensure that you can comfortably afford the ongoing costs of second home ownership.

Second home mortgage alternatives

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, 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. However, 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. Keep in mind, 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 financing option 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. HELOCs offer a useful way to generate funds for your second home but come with risks, as they are secured against your primary residence.

FAQ: Second home mortgage 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.