If you’re in the market for a second home, you might be wondering how exactly to make that happen. Are second home mortgage requirements different from those for a primary residence? How do I know if I can afford the mortgage on a second home? And is buying a second home right now really the right move?
There are a few financial and lifestyle puzzle pieces to put in place before you purchase that second home, especially if it’s a vacation property in another state.
But answering these questions is less complicated than you may think, and we’ve created a guide to second home mortgage requirements to make it that much easier.
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The application process for a second home is the same as purchasing a primary residence, or the home you live in most of the time, said Brian Coutu, a mortgage advisor at Fairway Independent Mortgage Corporation (Fairway owns Home.com). Buyers will need to provide documentation of their income, assets, and debts, and their loan officer will pull their credit score.
It’s a good idea to get preapproved* for a second home loan before you start looking at properties so you know that you will qualify and how much you can afford.
Although the application process is the same as for a primary residence, the financial requirements are higher for a second home. Here are the basic requirements for getting a mortgage on a second home.
Homeowners who wish to buy a second property need to show proof that they earn enough income to pay the mortgage on their primary home, personal expenses such as cars and monthly debts, and the second home mortgage payment.
And all of those monthly debt obligations must fall below 50% of their total income, said Nicole Rueth, senior vice president at Fairway.
Lenders are looking at not just the monthly payments but insurance, ongoing repairs and maintenance, and general upkeep that you can comfortably fit within your current budget, according to Laura Adams, personal finance expert at Clearsurance.com.
“They’re going to make sure you can keep that property in good shape, “Adams said, “You’re going to be able to make those payments.”
The minimum credit score for a conventional loan is 620, though some lenders may require higher scores for second homes. A higher credit score can also help you get a lower mortgage interest rate — and that matters, because second homes tend to have higher interest rates than those on primary residences to begin with.
“If you’ve got a score of 740 or above, you’re going to likely qualify for the most competitive interest rates,” Adams comments. “But even with that said, you’re going to be scrutinized more [on a second mortgage] and your interest rate may be higher even if you have great credit.”
The minimum down payment requirement for a conventional loan on a second home is 10% — significantly higher than the requirements on loans for most primary homes. For instance, some conventional loans have options for 3% or 5% down payments.
The requirements are higher on a second home, because second home mortgages represent greater risk. If you fall on financial difficulties, you are more likely to prioritize the payment on your first home loan, rather than the second property. This makes sense, since the first home is your primary residence and you may only spend part of the year at the second home.
The bigger down payment requirement can be a roadblock. That’s why many second home buyers pull money out of the equity in their primary home via a cash-out refinance or home equity line of credit (HELOC). With rising home values, many homeowners have enough equity to easily pull out a 10-20% down payment. Just make sure you can afford payments on the extra loan balance you’ll be taking.
And you’ll want to try to achieve 20% down on the second home if possible.
If you put down less than 20%, you will owe private mortgage insurance (PMI), says Lori Martin, a senior Loan Officer at Fairway. PMI falls off automatically when you have 22% equity in the home. You can also refinance when you have at least 20% equity.
PMI on a second home will cost around 0.60% of the loan amount annually when putting 10% down, says PMI provider MGIC. That amount is broken up into 12 equal installments and paid along with the mortgage payment. On a $200,000 home loan, that’s about $100 per month on top of your regular payment.
Keep in mind that in addition to the down payment, you’ll also need money for closing costs, which are usually 2-5% of the loan amount.
You will need cash reserves — assets that could cover your mortgage payment if your income drops — for a second home mortgage, according to Martin. However, she said the reserves do not have to be liquid (readily available) in a checking or savings account. Funds in a 401k or other retirement plan also count toward your reserves.
Related reading: The Basics of Buying a Second Home in Another State
Buying a second home is exciting step, especially if it can double as a personal getaway and an income-generating property.
Before you start scoping out vacation homes, though, you need to crunch the numbers.
“Taking on a second property and mortgage are pretty big financial responsibilities, not just with your mortgage payment, but also the ongoing maintenance, insurance, property taxes. And all of that means a significant financial commitment,” Adams said.
You can run the numbers on your own using a home affordability calculator, which will allow you to see how much you’re likely to qualify for based on your income and monthly debts, including the mortgage payment on your second home.
But you’ll also want to factor in non-debt expenses — home maintenance costs and utilities on your primary residence, day-to-day costs for commuting and groceries, and other bills. Look closely at whether there’s enough money left in your budget for another mortgage payment and housing-related expenses, such as homeowners insurance and property taxes, on a second home.
Consider the purchase in the context of your larger financial goals and responsibilities as well. Buying a second home should add to your quality of life and wealth creation strategy rather than put you in a pinch.
“Making sure it fits within your overall financial plan is really important. For instance, if you’re not saving for retirement, you don’t have an ample emergency fund, or you don’t have all the proper types of insurance to keep you safe, it might not be a good idea to buy a second home,” Adams said.
Where to purchase a second home
If you’re confident that the numbers make sense, the next question is where to purchase the property.
For starters, the property’s location must make sense. No one buys a second home a mile away. The lender will assume it’s an investment property and apply rules accordingly.
There’s typically no distance requirement, but the home, if close by, must be in a vacation or resort area. Think beach, mountains, golf course. If the home’s location denotes vacation home, that’s a good first step.
Next, think about where you travel. Maybe you often visit a particular city for work, and you’d prefer to have your own place to stay rather than living out of a hotel. Or perhaps you’ve got a go-to vacation spot and want to purchase there.
In the latter case, think about how often you actually travel there and how much time you spend in that location. If you visit once a year for a couple of weeks, it may make sense to rent a house or stay in a hotel. But if it’s a place you spend a significant amount of time, or is even a place you plan to eventually retire to, then purchasing a home may be the right move.
Before moving ahead with the purchase, though, ask yourself this: Are you ready to maintain another property yourself, particularly if it includes traveling to the house? Or will you hire a local property manager to oversee upkeep on the home? Either way, you’ll want to factor these expenses into the overall costs.
Martin suggested having partners who can advise you on the local real estate market and provide recommendations for reputable service providers or property management companies.
The biggest difference between second homes and investment properties is occupancy.
“A primary home is a loan taken for a home that a buyer will primarily live in throughout the year. A second home is also an owner-occupied property, but it’ll be used for some portion of the year and no rental income may be used in qualifying,” Coutu said. “An investment property is when a buyer is strictly renting the home to tenants with no plans to occupy the property.”
Some mortgage lenders specialize in second homes and/or investment properties, but the loan terms, mortgage rates, and down payment amounts can vary significantly depending on the property you want to buy, the type of loan you’re using, and your lender’s requirements.
“A second home requires a buyer to occupy the property for a portion of the year and no rental income can be used to qualify as a second home buyer,” Coutu said. “Second home buyers can put as little as 10% down, but an investment property requires at least 15% down, is for the purpose of renting out, and in most cases rental income can be used in qualifying that buyer, which helps offset the liability in the debt-to-income ratio.”
That’s why it’s important to think through the purchase and how you’ll use the home before you buy it. If you’re buying in a popular vacation spot and plan to rent out the home most of the year because you’ll only spend a few weeks there annually, then you’re likely going to want an investment loan.
True, you’ll need a larger down payment and a higher credit score (and you will get a higher interest rate, as investment properties have higher rates than those for owner-occupied homes).
However, you’ll be able to use 75% of the potential rental income to qualify for the loan, according to Rueth. You may even benefit come tax time. The IRS allows some rental property expenses as tax-deductible, though you will want to consult your tax attorney or accountant about your situation and tax obligations.
But if you’re buying the home mainly as a vacation property for you and your family to enjoy, you’ll likely need a second home mortgage.
Perhaps you’d like to do both — have the property available whenever you want to use it, but rent it out for short-term stays when you’re not there. In that case, your best bet is to talk with a lender, as they will explain which loan options are available to you based on your finances and goals for the home.
Second Home Mortgage Requirements FAQs
Second home mortgage requirements including a minimum credit score of 620, a debt-to-income ratio of 50% or less, a 10% minimum down payment, and you may be required to have cash reserves as well.
No. You can put down as little as 10% on a second home, but you’ll have to pay PMI if you put down less than 20%.
Depending on your lender, sale contract, and the documentation needed, it can take from two weeks up to 45 days from your loan pre-approval to closing.
You can buy a second home while paying the mortgage on your current home, as long as you meet the second home mortgage requirements — including having a 620 or higher credit score, making a down payment of 10% or more, and having adequate cash reserves.
Yes. Many people in expensive cities choose to rent their primary residence and purchase a secondary residence in a nearby vacation spot. There are no rules against this. You will qualify for the loan using standard second home requirements, and you’ll verify your current rent to qualify.
A second home can be a wonderful lifestyle upgrade and boon to your wealth creation strategy. The key to making it work is understanding how much you can afford to spend on a second property before you start looking at vacation homes and making plans. To get started on the right foot, talk to a lender about your eligibility and which loan options are right for you.
*Pre-approval is based on a preliminary review of credit information provided to Fairway Independent Mortgage Corporation, which has not been reviewed by underwriting. If you have submitted verifying documentation, you have done so voluntarily. Final loan approval is subject to a full underwriting review of support documentation including, but not limited to, applicants’ creditworthiness, assets, income information, and a satisfactory appraisal.