5 Things To Know About Buying A Second Home (2024)

Buying a second home—also called a vacation home—can be a wise financial move if you plan to use it several times a year. But if you need a mortgage to buy a second property, be prepared for tougher underwriting requirements and to provide a larger minimum down payment. You may also need to have higher cash reserves than you did on your primary residence.

Second Home Mortgage Rates

Current primary home, 30-year mortgage rates are 7.12%, and 15-year mortgage rates are 6.55%. Second home mortgage rates are slightly higher than primary home rates—usually by 0.5% to 0.75%.

Borrowers may be at greater risk of default if they face financial hardship and have two mortgage payments to juggle.

How To Buy a Second Home

When you buy a second home, your financial situation may differ from when you took out a mortgage on your primary home.

For this and other reasons, here are some important things to consider before financing a second property:

• Understand your credit score. You will likely need a credit score of at least 620 to qualify for a second home mortgage. If your score is below that, look for ways to improve it, such as paying down high-interest debt.
• Review your goals. Consider all the reasons why you want to buy a second property. For example, will your family make good use of it in the years to come? Will the home require a lot of repairs or renovations? Is this a true second home or will it be used as an investment property? Your use of the property will impact the type of loans you’ll qualify for and your qualification requirements.
• Visit the surrounding area. Is the home in a neighborhood where the property may gain value? Is this an area where you’ll enjoy spending time in the long term? What kind of recreation is nearby? Also, connect with real estate agents who can give you a sense of the local housing market and amenities in the areas you’re considering.
• Know your tax situation. The tax breaks and credits you enjoy on your primary residence may not apply to a second home. Depending on the home’s location, your personal income and legal right to rent the property, your property taxes and possible deductions will vary. Additionally, if you rent out your second home for more than 14 days a year, the IRS may view it as a rental property and tax the rental payments as income.

Here are some other things to consider when buying a second home—including more details about lending requirements, costs and the loan application process for a second-home mortgage.

1. Your First Home Could Help Fund Your Second

If you have a large amount of equity in your primary home, you could obtain enough money to pay for most—if not all—of the cost of a second home.

Two options include:

Cash-Out Refinance

A cash-out refinance is when you replace your current mortgage with a new, larger mortgage so you can access cash by tapping your home equity. A cash-out refinance is taken out on a primary home mortgage, so you might be able to borrow more money at a lower interest rate instead of taking out a home equity loan or home equity line of credit (HELOC).

With a cash-out refinance, you could get a loan of up to 85% of your first home’s value. However, watch out for closing costs and higher interest rates today—which might limit the amount of equity you can withdraw.

Home Equity Loan or HELOC

Home equity loans and HELOCs are second mortgages that rely on your primary home as collateral to withdraw a portion of your equity in cash. Most home equity loans are distributed as fixed-rate, lump-sum loans. HELOCs have variable rates and are mostly used for various expenses over time.

With both options, you might be allowed to take out a higher amount—possibly up to 85% to 90% of your home’s equity—than using a cash-out refinance.

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

Assuming that you still reside in your primary home, you will need to justify the need for a second home. Lending underwriters must follow the guidelines set by Fannie Mae and Freddie Mac—the government-sponsored enterprises that back most mortgages in the U.S.

Lenders consider properties used as second homes 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, you have to meet the following lender requirements:

• You must live in the home for part of the year and keep it for your personal use and enjoyment for at least half the year.
• Your second home must function as a vacation home year-round and is only one unit.
• You can do short-term rentals, but the home cannot be rented or managed by a property management company.
• Your vacation home can’t be located within 50 miles of your primary residence, which might disqualify it from being classified as a vacation home.

Investment Property

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

Lenders consider investment properties to be higher risk based on the potential for rental damage. Also, you may be more likely to skip payments on an investment property if you get into financial trouble. Your lender may ask for a rent schedule and/or lease agreement to prove that you are planning to rent the property.

In most cases, you won’t be able to get a VA or FHA loan to buy a second home or investment property, as those loan products are only available for primary residences. The exception to this rule—known as house hacking—is where you can use an FHA or VA loan to buy a multifamily property with up to four units; you can rent the other units out as long as you live in one of the units as your primary residence.

3. Underwriting Is Tougher

Since you already have one mortgage, expect the underwriting process to be even tougher when you’re trying to get a second. Lenders may ask for larger down payments and charge higher interest rates.

Here’s a look at how underwriting is different for a second mortgage:

• Credit score. Fannie Mae set a minimum credit score of 640 for a second home as long as there is a down payment of 25% or more. Comparably, the minimum credit score for a primary home is 620.
• Debt-to-income (DTI) ratio. A typical requirement for borrowers seeking a mortgage is to have a maximum DTI level of about 43%. However, it’s much tougher to meet that standard if you already have a primary home mortgage and other debts. If you’re planning to rent out the second home, you can see if the lender will include that income in the mortgage underwriting.
• Higher down payment. Down payments on conventional loans for primary residences can be as low as 3%, but many lenders require 10% or more for second homes. Putting less than 20% down means you may have to pay private mortgage insurance (PMI) on a second home mortgage. Borrowing equity from your primary residence may be an ideal way to fund a down payment large enough to avoid PMI on your second home.
• Ample cash reserves. You’ll need two to six months of cash reserves to qualify for a second home mortgage. Lenders want to ensure you can handle a disruption to your income and you can continue making monthly payments if you lose your job or experience another financial hardship.

4. Budget for Additional Costs

A second home means another set of housing expenses that you’ll need to factor into your budget, such as:

• Homeowners insurance. You may have to pay more for homeowners insurance on a vacation home based on its location and how often you’re occupying the property. You may be able to add liability protection for your second home with your primary residence’s policy. However, you might not get as much coverage on the second home’s policy because you’re not occupying it as often and aren’t keeping as many valuables on site. As a result, your insurer might ask you to identify specific situations—known as “named perils”—and your coverage would be limited to those situations only.
• Furnishings. You’ll need to fill a vacation 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, bathroom fixtures and everyday items for the kitchen and other spaces.
• Maintenance. All homes need maintenance of some sort, including lawn care, snow removal and routine maintenance. Depending on the age and condition of a property, you may have to budget for major repairs to the roof, driveway and patio/deck. Consider these items when evaluating your expected start-up costs, the monthly budget and long-term expense planning.
• Utilities. You’ll need to budget for monthly electricity, water, gas and other utilities each month. Depending on the location, these costs may be higher than your primary residence.
• Property taxes. Property taxes are also part of the mix even if your mortgage payment is relatively small. Check on property tax policies and rates if you’re buying in a different state than your primary home.

5. Conduct Research and Get Professional Advice

There are many factors that could make the difference between a second home being a solid investment or a financial disaster. Here are some questions to consider and seek professional advice on:

• Will you use the home enough to justify its purchase?
• Is it cheaper to stay at a nearby hotel or rental home rather than buy a home for your vacations?
• Will your household income support two mortgages for another 5, 10, 20 years or more?
• Can you handle the second home mortgage payments and other significant expenses or debts—such as college tuition, auto purchases or major home repairs—that may arise?
• What are the startup costs for the new home—such as furnishings and renovations—alongside the ongoing costs, including maintenance, major repairs, and travel to and from the property and your primary home?
• Are you eligible for any tax breaks by owning a second home?

Evaluating your finances, creating a budget and talking to those affected by the transaction—namely, your family—can go a long way in preparing you to purchase a second home.

Can You Afford a Second Home?

Your budget likely changed since you took out your first mortgage. Because of this, review your assets, income, savings, and current/anticipated expenses to determine if you can take on a second mortgage and the other monthly costs that come with a vacation home.

Make sure you have two to six months of cash reserves on hand to cover mortgage payments in the event of a job loss or other financial hardship.

Use a mortgage calculator to estimate the monthly payments on your second home. After adding this estimated monthly payment to all your other debt obligations and expenses, divide your total monthly costs by your monthly household income to determine if your DTI ratio is at or below the 43% threshold for a second mortgage.

Finally, if you realize you can’t afford your first choice for a second home, consider widening your search to smaller homes or different property types—like a townhouse or condo instead of a single-family home—or look in less expensive areas.

Frequently Asked Questions (FAQs)