Key Takeaways
- Second home mortgages require higher down payments, stronger credit, and additional cash reserves than primary home loans.
- Most buyers need at least 10% down, with 20–25% often required for lower credit scores or higher debt-to-income ratios.
- Second home interest rates usually run slightly higher than those for primary residences but lower than those for investment properties.
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
Verify your second home mortgage eligibility. Start here
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 can rent the property when it’s not in use. However, rental periods are typically limited to 180 days per year, and potential rental income cannot be factored into your mortgage qualification criteria.
To qualify for a second home loan, the property must meet specific second home requirements.
- 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.
Verify your second home mortgage eligibility. Start here1. 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.
Check your eligibility for a second home loan. Start here2. 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.
Check your cash-back loan options. Start hereOne 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.
What can you use a second home for?
A second home is a property that you do not occupy as your primary residence, but you use it for personal, practical, or limited-income purposes. Lenders assess how you plan to use the property because this determines whether the loan is classified as a second home mortgage or if it becomes an investment property.
- Vacation home. You use the property as a personal getaway for leisure or seasonal stays, such as a beach condo, mountain cabin, or lake house.
- Secondary residence. You use the home part-time for practical reasons, such as staying closer to work, family, or a future retirement location.
- Limited rental use. You rent the home on a short-term basis when you are not using it, while avoiding long-term or full-time rentals that would trigger investment property rules and different treatment by lenders and the IRS.
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:
Can you buy a second home with FHA loans or VA loans?
You generally cannot use FHA or VA loans to buy a second home because these programs are limited to primary residences. You might qualify in specific situations, such as using a VA loan to buy a new primary residence while converting your current one into a second home, or assuming an existing FHA or VA loan from a seller if the loan allows assumption. Most of the time, you’ll need a conventional loan that follows Fannie Mae and Freddie Mac rules to finance a second home.
Costs and fees associated with second home mortgages
- Second home mortgage rates. You typically pay interest rates about 0.25–0.50% higher than on a primary residence. You can lower your cost by comparing quotes from three to five lenders and reviewing both the rate and APR.
- Closing costs and down payment. You usually pay closing costs of about 2–5% of the loan amount, in addition to a down payment that often ranges from 10–20% of the purchase price.
- Private mortgage insurance (PMI). You might need PMI if your down payment is less than 20%, with annual premiums usually ranging from 0.5% to 1.5% of the loan amount, added to your monthly payment.
- Ongoing costs. You need to plan for recurring expenses such as property taxes, homeowners insurance, HOA fees, utilities, and maintenance, which can add hundreds to thousands of dollars to your monthly budget.
Second home mortgage alternatives
While a second home mortgage is a common way to finance a second property, it isn’t the only option available. If you’re a first-time buyer of a second home or have substantial equity in your primary residence, look into the following alternatives.
FAQs about second home mortgage requirements
Compare second home mortgage quotes from multiple lenders. Start hereA second home mortgage is a specific type of loan you obtain when buying a second home, whether it’s a vacation or a secondary residence. These mortgages differ from those for primary homes or investment properties, mainly due to lenders’ risk assessments.
To be eligible for a second home mortgage, the property must be a single-unit dwelling fit for year-round use that you have exclusive rights to. Typically, the property should also be located a certain distance away from your primary residence.
Generally, you can’t count anticipated rental income to meet eligibility criteria when buying a second home mortgage. However, if you decide to rent the property out, you can use this income to indirectly cover your monthly mortgage payments, keeping in mind that rental duration is often limited to maintain the property’s status as a second home.
The main distinctions lie in the property’s intended use and the loan conditions. A second home is mainly for personal use, while an investment property is geared towards generating income or capital gains. Investment property mortgages usually have higher interest rates and more stringent qualifications.
Yes, when buying a second home, you have the option to leverage the equity in your primary residence through either a cash-out refinance or a Home Equity Line of Credit (HELOC). However, these methods come with their own sets of risks and rules, so it’s advisable to consult with a mortgage expert.
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.
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