What to know about second home mortgages
Buying a second home offers both a getaway and potential income, but the rules for a second home mortgage differ from your primary residence.
A second property can serve as a personal escape, allowing you to skip costly hotel stays during vacations. Additionally, if you rent it out, the rental income could potentially cover your mortgage costs, making the investment financially rewarding.
Before you jump in, though, you should understand the second home mortgage requirements. They’re a little different from the mortgage on your main home. Here’s what you need to know.Verify your second home mortgage eligibility. Start here
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What is a second home?
A second home is essentially a property that you own in addition to your primary residence. While your main home is where you likely spend the majority of your time, a second home can serve multiple purposes.
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.
Uses for a second home
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:
- 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
- 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
- Investment properties: A second home can also function as a moneymaker. Through renting it out, either as a long-term lease or a short-term holiday rental, you can generate additional income. Just remember that investment properties may have different mortgage requirements and tax implications compared to other types of second homes
Understanding the purpose your second home will serve is important to your home buying process, influencing everything from the type of second home mortgage you’ll need to your long-term financial planning.
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.Verify your second home mortgage eligibility. Start here
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.
Second homes 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.
Compare investment property rate quotes from multiple lenders. Start here
How to buy a second home
Buying a second home is more than just an exciting life milestone; it’s a multi-step journey requiring thoughtful planning and financial prudence. Unlike your first home, purchasing a second property comes with its own set of unique considerations. To help you navigate this intricate process, here’s a detailed breakdown into five steps.Check your second home mortgage eligibility. Start here
Step 1: House Hunting
When searching for a second home, key elements to consider are location, property type, and the home’s suitability for year-round living. These factors not only influence your enjoyment of the property but also impact the kind of second home mortgage for which you may qualify.
Do thorough research and consult your real estate agent to ensure the property meets the specific requirements that classify it as a second home, like distance from your primary residence and the potential for rental income.
Step 2: Decide how to finance your new home
The second home mortgage options available to you will depend on your intended use for the property. Whether it’s going to be a getaway spot or a potential rental, different eligibility criteria apply, given that these loans pose a higher risk to lenders.
Moreover, interest rates for these kinds of loans are often not aligned with those for your current home.
When it comes to popular mortgage choices for buying a second home, conventional and jumbo loans are common.
- With a conventional loan, you’ll typically need to front at least 10% of the loan amount as a down payment.
- For jumbo loans, the down payment escalates to 20% or more.
Government-backed loans like VA and FHA mortgages are generally not an option for financing a new home that won’t be your primary residence. These loans are specifically tailored for first-time or primary home buyers.
Remember, your lender and potentially the IRS will have a say in how the property is categorized, which affects various aspects like your monthly mortgage payments.Check your conventional loan eligibility. Start here
If you plan to spend a considerable amount of time living in your second home during the year, then it can qualify as a “second home” for mortgage purposes. Otherwise, it might be classified as an investment property, altering the requirements you’ll need to fulfill to secure a mortgage.
Step 3: Get mortgage pre-approval
Getting pre-approved should be among your first moves when contemplating buying a second home. A mortgage lender will review your credit score, outstanding debts, and income to give you a pre-approval letter, which essentially outlines how much you can afford to borrow.
This document serves dual purposes. Firstly, it confirms your budget, helping you focus your house-hunting efforts on properties within your financial reach. Secondly, a pre-approval letter gives you a competitive edge in hot real estate markets by signaling to sellers that you’re a serious, qualified buyer.
Step 4: Make an offer
Identified a dream property? The next step in buying a second home is making an offer.
Work closely with your real estate agent to craft an offer that reflects both the property’s value and current market conditions. Given that you’re not the only potential buyer, be prepared to negotiate.
Your agent can help you understand the nuances of negotiation strategy, such as when to make a counteroffer and when to walk away
Step 5: Close the sale
Your offer got accepted? Congratulations, you’re nearly at the finish line of buying a second home! Now it’s time to finalize your mortgage terms, undergo a title search, and sign a mountain of paperwork.
Be prepared for closing costs, which include a range of fees for services provided by different entities involved in the transaction. Once everything’s signed, sealed, and delivered, you’ll receive the keys to your second home, marking your transition from prospective buyer to bona fide homeowner.
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.Check your second home mortgage rates. Start here
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.
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.Check your eligibility for a second home loan. Start here
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.Verify your second home mortgage eligibility. Start here
- 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.Check your eligibility for a second home loan. Start here
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.Check your cash-back loan options. Start here
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.
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.Verify your second home mortgage eligibility. Start here
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.
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.
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.Check your cash-out refinance options. Start here
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.
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.
Can I afford a second home?
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 mortgage requirements
A 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. This mortgage varies from those for primary homes or investment properties, mainly due to different risk assessments by lenders.
When buying a second home, the property must meet certain qualifications to be eligible for a second home mortgage. It needs to be a single-unit dwelling that’s fit for year-round use. Additionally, you must have exclusive rights to the property—no timeshare agreements or long-term leases are allowed. 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. That said, if you decide to rent the property out, you can use this income to indirectly cover your monthly mortgage payments. Keep in mind that rental duration is often limited to 180 days per year to maintain the property’s status as a second home.
When buying a second home, it’s essential to understand the differences between a second home mortgage and an investment property mortgage. The main distinctions lie in how you intend to use the property and the loan conditions. A second home is mainly for personal use, while an investment property is geared towards generating income or capital gains. Mortgages for investment properties usually come with higher interest rates and more stringent qualifications than second home mortgages.
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). These methods allow you to borrow against the value of your existing home but come with their own sets of risks and rules. It’s advisable to consult with a mortgage expert to fully understand the implications.
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.Time to make a move? Let us find the right mortgage for you