Financing a second home or investment property: What to expect
If you got a mortgage for your primary residence (the home you live in), you might expect to get the same interest rates or loan offers on your second home.
But that’s not often the case.
Here’s what you can expect when you apply for a second home or investment property mortgage.Verify your eligibility for second home financing. Start here (Jan 20th, 2022)
In this article (Skip to...)
- Mortgage rates
- Second home financing
- Investment property financing
- Compare to: primary home financing
- Why the rules are different
- Can you avoid higher rates?
- Second home or investment property loan?
- Today’s second home mortgage rates
Second home mortgage rates vs. investment property mortgage rates
Mortgage rates are higher for second homes and investment properties than for the home you live in.
Generally, investment property rates are about 0.5% to 0.75% higher than market rates. For a second home or vacation home, they’re only slightly higher than the rate you’d qualify for on a primary residence.
- Second home mortgage rates: Usually less than 0.50% higher than your primary home rate
- Investment property mortgage rates: Around 0.50% to 0.75% higher than your primary home rate
Of course, investment property and second home mortgage rates still depend on the same factors as primary home mortgage rates. Yours will vary based on the market, your income, credit score, location, and other factors.
If your financial situation has changed since you bought your first home, your new mortgage rate might vary by a wider margin than average.Verify your new rate today. Start here (Jan 20th, 2022)
Second home mortgage rates and rules
Here’s what you need to know about second home mortgage rates and requirements if you want to buy a vacation home: one you'll live in for part of the year, but not full time.
Occupancy: part–time occupancy required
Lenders expect a vacation or second home to be used by you, your family, and friends for at least part of the year. However, you’re often allowed to earn rental income on the house when you’re not using it. Rental income rules vary by lender.
Second home interest rates: slightly above market
A second home is not a primary residence, so lenders see more risk and charge higher interest rates. But not nearly as high as investment property rates.
Down payment: usually 10% or more
Some lenders will want 10% down for a vacation home. And if your application isn’t as strong (say you have a lower credit score or smaller cash reserves), you may have to put 20% or more down.
Credit score: 640 or higher
The purchase of a second home or vacation home requires higher credit scores, typically in the 640 or higher range. Lenders will also look for less debt and more affordability – meaning tighter debt–to–income ratios. Strong reserves (extra funds after closing) are a big help, too.Verify your eligibility for a second home loan. Start here (Jan 20th, 2022)
Investment property mortgage rates and rules
Here’s what you should know about mortgage rules if you’re purchasing an investment property: one you will not live in at all and plan to rent out year-round.
Occupancy: not required
If you’re financing a home as an investment property, and you plan to rent it out full–time, you are not personally required to live in the building for any amount of time.
Investment property loan rates: 0.50% to 0.75% above market
Mortgage rates are quite a bit higher for investment properties. Often, your interest rate will be 0.5% to 0.75% higher for an investment property than it would be if you were buying the same home as a primary residence.
Down payment: 15% to 25%
Down payment requirements for an investment property range from 15% for a one–unit property to 25% for a two– to four–unit property. You may also be required to make a bigger down payment depending on your application and the type of loan you qualify for.
Private lenders – sometimes called “hard money” lenders – might also make asset–based loans. The borrower puts down 30% or 40% of the purchase price and the lender provides the balance.
Flippers often use such short–term mortgage loans to finance their deals. However, this can be risky. If the property does not sell for enough to cover the loan amount, or if the property does not sell at all, the borrower can face foreclosure and the loss of all equity.
Credit score: 640 or higher
Lenders generally require borrowers to have a credit score above 640 for an investment property loan. However, rates can run very high for low credit scores. Hopefully your score is 680 to 700 or more before you think about investing in real estate.Verify your eligibility for an investment property loan. Start here (Jan 20th, 2022)
For comparison: Primary residence mortgages
When discussing second home and investment property mortgages, rates and rules are measured against those for primary residences. To give you a clear idea of what those benchmarks are, here are the typical lending rules for primary home mortgages:
Borrowers can purchase properties with one to four units using residential financing, provided they live in one of those units.
>Related: Guide to types of home loans
Generally, the home must be occupied within 60 days of closing. If married, both spouses must occupy the property. The property can be a single–family home or part of a multi–unit property such as a condo complex.
Interest rates: standard market rates
Because residential financing involves little risk, mortgage rates are low relative to vacation homes and investment properties. The market rates you see advertised by banks and lenders apply to primary residences.
Down–payment: starting at zero percent
Residential borrowers can finance with zero down for VA qualified borrowers, 3.5% down with FHA mortgages, 5% down with conforming financing, and 3% down with the Freddie Mac Home Possible program or the Fannie Mae HomeReady mortgage.
Credit scores: Starting at 500–620
You can finance a primary residence with a lot lower credit than you could for an investment or vacation property. FHA loans allow credit scores as low as 500 (with 10% down) or 580 (with 3.5% down). And most lenders allow credit scores starting at 620.
Why rates and loan options are different for second mortgages
The home you live in (your “primary residence”) is seen as the least risky form of real estate. It’s likely to be the one bill homeowners will pay if times get tough. A vacation home or investment property, on the other hand, is riskier. Borrowers are a lot more likely to forego those payments when money is short.
Because of the higher risk second homes pose, they come with stricter rules about financing.
As shown above, those rules include above–market interest rates, bigger down payments, higher credit scores, and more.
Of course, borrowers will find different lending standards for different types of property, depending on the lender and the mortgage program. So it’s important to compare loan options before financing a second home.Find vacation or investment financing. Start here (Jan 20th, 2022)
Can you avoid higher rates on a second home mortgage?
When you apply for a mortgage loan, you must declare how you intend to use the property. And lenders take such declarations seriously. That’s because they don’t want to finance riskier investment properties with residential financing.
It might be tempting to list your second home as a primary residence, and profit from lower interest rates or easier qualification. But it’s unwise to do so.
Lying on a mortgage application can land you fines in the thousands. In very serious cases, mortgage fraud can even lead to jail time.
So always be truthful with your lender. And ask plenty of questions if you’re not clear on the loan rules. For instance:
- Are you allowed to have overnight rentals?
- Are there limits regarding how many nights you can rent?
- How much time must you spend there for it to qualify as a vacation home instead of an investment property?
- Can you have an accessory dwelling unit?
Get answers in writing to ensure you fully understand the requirements for your second mortgage.
And if you’re having trouble qualifying with one lender, or finding the loan program you need, try another lender. They all have different loan options and rates.Find and lock a low mortgage rate today. Start here (Jan 20th, 2022)
Do I need a second home or investment property mortgage?
The real estate market is changing – and with it, mortgage rules. People are using their homes in new and different ways that can affect the type of home loans they need.
If you want to rent out part or all of your home, or another building on your property, that can affect financing. See a few examples below.
And if you’re not sure how your living situation will affect your mortgage loan, connect with a lender to learn more about which rules apply.
Homes as hotels (Airbnb and VRBO)
The growth of Airbnb and similar services means that homes can be used to generate income in new ways. A spare bedroom, basement apartment, or converted garage can now function as rental property. In major tourist destinations, prime residences are being converted to overnight rentals, raising home prices.
Generally, you can rent out part of your house and still finance it as a primary residence. But if you plan to use the home for vacationing yourself, and also rent it out, you’ll need a second home mortgage.
Accessory dwelling units or tiny homes
The affordable housing shortage in many areas is causing entire states to change zoning laws. Many homeowners are now able to build or purchase smaller homes on the same land lots as standalone single–family homes.
For example, New Hampshire now allows “accessory dwelling units” (ADUs) with up to 750 square feet on single–family lots. Oregon has eliminated single–family zoning in many communities. California is allowing multiple units for lots once restricted to single–family homes.
This could be a back–road for homeowners who want to purchase an investment property without an investment property mortgage. You might purchase a home with an ADU already attached, and live in the main unit. Or use a cash–out refinance on your current home to build an ADU on your property – as long as you keep living in the original building.
Either way, you can rent out the side property for some extra cash, even though it was technically purchased with a primary home mortgage.
Second homes as first homes
These days, some homebuyers are even purchasing a vacation home as their first home. This can be a good workaround for young professionals who want to buy property, but can’t afford it in their home cities.
But remember: In this situation, even though you’d be buying a vacation home with your first mortgage, it still qualifies as a second home mortgage. That’s because you wouldn’t be using the property as your primary residence.
Second home mortgage rates and investment property mortgage rates FAQ
Homeowners live in their second homes for at least a portion of the calendar year. Although each mortgage lender will have their own eligibility requirements, the IRS says a second home is a residence that you visit for at least 14 days each year, or 10% of the total days that you rent it out.
An investment property is typically a rental property or a home purchased to renovate and flip for a profit. They differ from second homes in that the buyer does not usually reside in an investment property. Additionally, they can also be larger than one–unit properties.
While it’s impossible to answer this question without knowing the rate on your existing mortgage loan, second home mortgages and investment properties typically have a higher interest rate. Of course, whatever rate you qualify for will vary depending on your income, credit score, location, and more.
Unless you’re paying cash for a second home purchase, you’re going to have a second mortgage payment. However, borrowers who have enough equity in their first home can leverage that value to finance a second home. Some homebuyers use a cash–out refinance to access home equity by replacing their current mortgage loan with a larger one, and then using the lump sum of leftover cash as a down payment for a second home mortgage. But for homebuyers who have recently refinanced or simply do not want to pay closing costs, a home equity loan or home equity line of credit (HELOC) could get second homebuyers access to up to 80% of the equity in their home.
Being unable to make the monthly payments on a second home mortgage or investment property loan is among the biggest risks for homebuyers. This is why it’s important to shop your second mortgage around to find lower interest rates and favorable loan terms to get modest monthly payments. Also, watch out for higher mortgage interest fees – even small increases to your rate can become a burden during the lifetime of a loan.
Check investment property and second home mortgage rates today
Mortgage rates for second homes and investment properties are higher than primary residences.
But today’s interest rates are low across the board – which means you’ll likely pay less for a second home mortgage than you would have a year or two ago.
Check your personalized rates to see what you qualify for today.Show me today's rates (Jan 20th, 2022)