How to Afford a Second Home

What Exactly Is A Second Home?

A second home is a residential property that you live in for at least 2 weeks each year. It may be a vacation home, a part-time or short-term rental property, or another home you use or visit on an occasional basis.

Types of properties that most people consider a second home include:

  • Condos
  • Townhomes
  • Stand-alone houses or structures

To be considered a second home, lenders will require you to prove it’s not a property with a timeshare agreement or to be used solely for investment purposes. According to the IRS, a second home is a property you live in for 10% of the overall days you rent it out, or you reside in for at least 14 days per year.

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The differences between mortgages on primary residences and second homes

On your primary mortgage, you might be able to put as little as 5% down, depending on your credit score and other factors. On a second home, however, you will likely need to put down at least 10%. Because a second mortgage generally adds more financial pressure for a homebuyer, lenders typically look for a slightly higher credit score on a second mortgage. Your interest rate on a second mortgage may also be higher than on your primary mortgage.

Otherwise, the process of applying for a second home mortgage is similar to that of a primary residence mortgage. As with any loan, you should do your research, talk with multiple lenders and choose the loan that works best for you.

Options for making a down payment on your second home

You have a few options to consider when making a down payment on your second home. You could use a cash-out refinance or open a Home Equity Line of Credit (HELOC) on your current home, or you can use your savings to make the down payment.

1. Cash-out refinance

If you have built up enough equity in your primary home, a cash-out refinance allows you to tap into that equity, especially if your home has increased in value since you bought it. Borrowers with good credit can typically borrow up to 80% of their home’s current value. Before you go this direction, make sure you can afford the larger monthly payment you’ll now owe on your primary home.

2. HELOC

A HELOC, or home equity line of credit, on your primary residence is another popular option. If you have enough equity in your primary home, you can take out a line of credit and use those funds to make a down payment on your second property. This means you don’t need to refinance your current mortgage.

Buying a second home may seem difficult, but if you know what to expect and review your finances, it could be easier than you think. Keep these factors in mind as you think about whether you can afford a second home, and how to get a mortgage for it.

Is a rental the same as a vacation home?

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.

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.

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.

Option 2: Home Equity Loan

For homeowners who have substantial equity in their property, a home equity loan may be an option. However, lenders are less willing to approve a home equity loan that drains too much equity from the principal residence out of concern that home values could continue to decline. Lenders assume that if the homeowners run into financial trouble, they will be more aggressive in keeping up with payments on the primary residence rather than the vacation home.

To get a loan to buy a vacation home, be prepared to pay more upfront, and to show that you have a higher credit score and better debt-to-income ratio than you would need when applying for a mortgage for a primary residence.

Second home mortgage options

If you’re thinking about buying a second home this year, there are a few different ways you can fund the purchase.

You may not even have to take a loan out on the second home.

These are the most popular methods of making a down payment — or paying cash — for a second home.

1. Use a cash-out refinance on your primary home

Many homeowners have built substantial equity in their primary or rental residence in the past few years. They can tap into this equity via a cash-out refinance.

For example, say a homeowner owes $100,000 on their mortgage, but their home is now valued at $200,000 due to appreciation. They could withdraw some of the equity by refinancing into a bigger loan and taking the difference in cash.

In this case, the borrower would have access to a substantial down payment on a second home:

  • New loan amount: $160,000
  • Current mortgage: $100,000
  • Closing costs: $3,000
  • Available cash for a down payment: $57,000

Borrowers who have good credit could borrow up to 80% of their home’s current value with a conforming loan. Other loan types allow an even higher percentage.

For example, veterans may have access to 100 percent of their equity if they use a VA cash-out loan.

2. Open a home equity loan or HELOC on your current home

According to NAR’s annual vacation home buyer survey, a home equity line of credit (HELOC) on a primary residence is a favorite funding source for second home buyers.

If you have enough equity in your home right now, then you could simply take out a line of credit and buy your second home outright or use the funds to make a down payment.

This option would eliminate the need to refinance your current mortgage. You would keep your first mortgage intact and add another loan with different terms.

You might want a HELOC if you have recently refinanced into a very low rate. Opening a line of credit does not affect your first mortgage payment.

Typically, applicants need good to excellent credit for a HELOC. But these second mortgages come with some interesting perks.

Once approved, cash generated from the loan is yours to use as you wish. You can use the credit available, pay it back, and then tap it again throughout your HELOC’s loan term.

Plus, you may be able to avoid the higher closing costs you’d have to pay by taking out a new primary mortgage.

If you don’t like the variable interest rates that come with most HELOCs, you could get a home equity loan that has a fixed rate.

The fixed option comes with a slightly higher rate but has better payment stability built-in, making it a good choice for some second home buyers.

3. Get a loan on the second home itself

As discussed above, another option is to get a loan via conventional financing.

Current rules allow for down payments as low as 10%, and credit eligibility guidelines can be lenient depending on the lender.

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

Uses For A Second Home

Some buyers already have a clear vision for their second home before making their purchase, but it’s OK if you’re not sure. Consider your options – it may even change your location. It’s important to note that with Rocket Mortgage®, the property may qualify as a second home if it’s rented out for no more than 180 days in a calendar year. You must also reside in the home for either 14 days or 10% of the days the property is rented, whichever is greater.

  • Vacation home: If you have a large family, you vacation often, or simply want your own spot to call home when you’re away, a vacation property might be what you’re looking for. You should choose a location you love visiting and exploring. For many, jumbo loans or conventional loans are the best option for a vacation home mortgage. It’s important to remember this mortgage process is similar to taking out a loan on your primary home, just with slightly stricter requirements.
  • Secondary residence: Does your job require a good deal of travel or time spent in another city? You might consider using your property as a secondary residence.
  • Investment property: Some homeowners will buy a second home as an investment property. Typically, this means either flipping and reselling the home, or turning it into a rental property. Investment properties have different requirements and mortgage rates for second homes. For example, many homeowners cannot use a jumbo loan to finance an investment property, as many lenders consider it an “investment” if rented out more than 14 days of a year. This is opposed to a conventional loan where you can rent your second home for up to 6 months. Federally backed loans such as FHA loans and VA loans are also out of the question. Make sure to discuss in detail with your mortgage professional to make sure your mortgage matches your goals. At Rocket Mortgage, you can get a jumbo loan on an investment property starting at a 20% down payment depending on the number of units you want.

You can use your second home for any combination of the above. You could vacation there for a designated period of time and rent it out via Airbnb and short-term leases for the rest of the year.

The Bottom Line

Buying a second home is an excellent way to expand your real estate portfolio and generate another stream of income. Before you buy your home, decide how it will be used and which location makes the most sense. Once you’ve budgeted and decided to invest in a second home, start thinking about the beginning stage of home buying, getting preapproved on a mortgage. This step is so crucial to deciding how much of your second home you can finance. Luckily, Rocket Mortgage can help speed up the buying process with a fast, intuitive mortgage application and quick approval process.

Learn more about how Rocket Mortgage can partner with you and get approved today. You can also give us a call at (833) 326-6018.

Look at your current home’s mortgage loan

Next, you need to double-check whether you can legally rent out your home by looking at your current loan agreement.

Most loans on your primary residence will stipulate that you have to live in the house for a certain amount of time — usually 12 months — before you can rent it. Other loans may prohibit you from renting your home at all, so it’s important to read the fine print, or you may need to refinance your loan to go through with this plan.

Depending on where you’re living, there may be restrictions within your homeowners’ association (HOA) that limits your ability to rent. But Gongora Brown says these restrictions are likely geared toward short-term “vacation” rentals rather than year-long leases.

How to Get a Mortgage for a Second Home

Depending on the type of mortgage you got on your primary residence, and your own preferences, you may have put as little as 3% down on your current home. However, down payment requirements on a second home are much more stringent. Many lenders, in fact, may ask you to put a minimum of 10% to 20% down. What your lender is asking for will likely depend on their own policies, your credit history and other factors.

In addition to a larger down payment, the lender will likely want to see that you have ample cash reserves to pay for two mortgages. This is on top of normal mortgage requirements, like income and credit score. This is necessary because lenders are taking a larger risk giving a mortgage to someone who already has one.

There are also some stipulations used by most lenders for a house to qualify as a second home or a vacation home. These include the following:

  • The owner lives in the home for at least part of the year
  • The home’s only owner is the buyer
  • The home is one-unit and is livable all year
  • The home is not under rent or the management of a real estate firm

4. There Are Many Added Costs

You might be picturing warm sunsets on the beach when you’re ready to purchase a second home. However, you should factor in these costs before your dreams materialize:

  • Insurance. In addition to paying more for home insurance due to the location of your house—think flood zones and areas with high wildfire risk—the cost may also be higher if you’re only there part-time or have renters. You may be able to combine some of your policy with the one on your primary residence, such as for liability coverage. But you might not get as much coverage on the second home’s policy since you’re at the second home only part-time and the insurance company might ask you to specify which situations—known as “known perils”—would be covered.
  • Furnishings. You’ll need to fill the home with essential furniture and appliances if they didn’t come as part of the home purchase. Plus, you may need to invest in decorations, bedroom and bathroom fixtures and everyday items for the kitchen.
  • Maintenance. All homes need maintenance of some sort, including lawn care, snow removal and roof, driveway and patio/deck repair and replacement. Consider these items when evaluating your expected start-up costs, the monthly budget and long-term expense planning.
  • Utilities. Electricity, water and other utilities are a constant monthly cost.
  • Taxes. Even if your mortgage payment is relatively small, remember that taxes will also increase costs. And, don’t forget to check on tax policies and rates if you’re buying in a different state.

2. Be Ready to Define How You Will Use the Home

Assuming your current home continues to be your primary residence, you will need to tell the mortgage lender how you will use the additional home. Lending underwriters must follow the guidelines of Fannie Mae and Freddie Mac, the government-sponsored enterprises that back about 70% of single-family home mortgages. Lenders consider properties that are used as second homes—rather than as investment properties—to be less risky, which means you may be able to qualify for a lower interest rate.

Second Home

Before you can classify a vacation home as a second home for mortgage purposes, you have to meet certain lender requirements:

  • You must live in the home at least part of the year and keep it for your personal use and enjoyment at least half the year
  • The home can function as a second home and is only one unit
  • You can provide short-term rentals, but the home cannot be under the control of a property management company
  • It can’t be located too close to your primary residence, which might disqualify it from being reasonably considered a vacation home

Investment Property

If you’re buying another home as an investment—whether to rent or to upgrade and resell—you might face a higher down payment and interest rate than for a mortgage on a vacation property.

Lenders consider investment properties to be higher risk because renters could ignore or exacerbate maintenance problems at the home. Also, lenders might worry that you’re more likely to skip payments on an investment property if you get into financial trouble. The lender may ask for a rent schedule and/or lease to prove that you are planning to rent the property.

Also, you won’t be able to get a VA or FHA loan for either scenario—those government-backed loan products are available only for primary residences.

Bottom line

Buying a second home means you always have a place to escape, but being a second homeowner comes with some harsh realities: more costs, more maintenance worries and more potential tax stresses. If you plan to obtain a second home mortgage, get the financing lined up in advance, and partner with the right real estate agent who has experience in the area you’re hoping to call your second home.

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