Buying a second home is a dream for many homeowners. But the process of financing a vacation home is more complicated than purchasing a house for the first time. Read on to learn how to get a vacation home mortgage, including lender guidelines and second home mortgage requirements.
Should I buy a second home?
Buying a second home can serve many purposes. Some homeowners consider buying a second home to rent out, while others want one as a vacation home. Regardless of the reason for buying a second home, the first question to ask is, can I afford a second home? Recently, more and more vacation homebuyers are purchasing second homes in cash; however, past data shows homeowners usually take out mortgages for second homes.
When financing a vacation home, keep in mind that second home loan requirements are different from those for primary residences. Additionally, tax laws surrounding second homes can make owning and financing a second home more complicated than first homes.
Vacation, rental, or investment property?
While consumers use the terms vacation home, rental property, and investment property interchangeably, mortgage lenders and the IRS distinguish between the various terms. When buying a second home that is not your primary residence, the home will fall into one of two categories: a second home or an investment property.
Second home: A second home is a property you own and plan to live in, such as a vacation home or a condo in a city you travel to frequently. Second homes can generate rental income, but the bottom line is you must also use it personally for part of the year. These properties are limited to one-unit homes.
Investment property: An investment property is a home you own but do not live in. These properties are purchased specifically for investment income, whether through renting the property or buying it to sell at a profit. Investment properties can be one- to four-unit homes.
Financing a second home: Mortgage requirements
Second home mortgage requirements and terms are different from home loans for primary residences. Because default rates on mortgages for second homes are higher than first home loans, lenders pose stricter guidelines for borrowers financing a vacation home.
First home vs. second home mortgage requirements
|Loan requirement||Primary residence mortgage||Second home mortgage|
|Property eligibility||One- to four-units||One-unit|
|Minimum credit score||620||620; some situations may require a higher score|
|Minimum down payment||0%-3.5%, depending on type of loan||10%|
|Maximum DTI ratio||45%, depending on other factors||45%, depending on other factors|
- Property eligibility: To qualify for a second home mortgage, the vacation home can only be a one-unit property.
- Occupancy: Second home mortgages require homeowners to live in the property at least part of the year.
- Credit score: The minimum credit score for a vacation home mortgage is 620. However, borrowers with seven or more financed properties must have a minimum credit score of 720.
- Down payment: When buying a second home, expect to put more money down. Second home mortgages usually require a minimum down payment of 10%.
- DTI ratio: The maximum debt-to-income (DTI) ratio for a vacation home loan is typically 45%; however, your lender will determine your DTI based on your credit score and amount of cash reserves. In some cases, a lender may allow a DTI as high as 50%, while in other situations, they may not allow it to exceed 36%.
- Cash reserves: Lenders require you to have liquid cash assets when financing a second home to prove you can handle the additional debt obligation. You may need to have as much as six months of the expected mortgage payment or more, depending on your credit score, DTI, and how many mortgages you have.
Tips on how to buy a second home
With the exception of stricter lending requirements for a second home mortgage, the process of buying a second home is similar to purchasing your first home. Here’s how to buy another house when you already have a mortgage.
- Determine the purpose of the second home. Before moving forward, know your goals for buying a second home. Do you intend to use it only as a vacation home? Will it be a part-time rental? Or is it solely an investment property? The answers to these questions will be a factor when looking at mortgages for a second home.
- Gather your financial information. Just like purchasing a primary residence, lenders will check your credit and require proof of your income, assets, and other financial information when buying a second home. Gathering the necessary information before applying for a second home mortgage will help the process go smoothly.
- Get preapproved. Consider getting preapproved before you begin seriously shopping for a property. While it’s not a required step, a preapproval can help objectively answer the question, can I afford a second home?
- Begin your home search. Consider working with a real estate professional to guide you through the process of buying a second home. Once you find a home and a seller accepts your offer, you’ll submit a complete application for the vacation home loan. To get the best rates and loan terms, apply with multiple lenders and compare their terms on second home mortgages.
- Close on the home. After going through the underwriting process, you’ll be ready to close on the property.
Second-home mortgage FAQs
Can I use rental income to qualify for my second-home mortgage? No. When buying a second home, any rental income you expect to receive from the property cannot be used to qualify for the mortgage in most situations. Lenders will see if your current income can support all of your debt, including the expected payment on the second home mortgage. On the other hand, lenders factor in a portion of the expected rental income on investment properties when underwriting an investment property loan.
I have a mortgage and want to buy another house. Can I get a vacation home loan when I already have a mortgage? Yes. You can secure a second home loan when you already have a mortgage. But keep in mind, second home mortgage requirements are stricter than loans for primary residences. You’ll have to make a larger down payment when financing a second home, as well as meet higher cash reserve requirements.
Can a second home be a primary residence? For tax purposes, homeowners cannot have a second home primary residence. You can use two homes for personal use — for example, your main home and a vacation home or your main home and an apartment in a city where you often visit — however, the home in which you live most of the time is your primary residence.
Is a rental the same as an investment property? When qualifying for a mortgage, an investment property is a home that you own to generate a profit and do not live in. The income can come from renting it out on an ongoing basis or from the sale of the property. A home you use for personal use and rent out part-time — such as a vacation home — is not considered an investment property when financing a second home.
Can I finance a vacation home with a government loan? No. You cannot use a government mortgage, such as a VA loan, FHA loan, or USDA loan, when buying a second home. Mortgages for second homes are usually conventional loans.
Ready to buy a home or explore your loan options? Speak with a local Finance of America Mortgage Advisor to begin the preapproval process today.