Why buy a second home? | Primary vs. second home mortgage | How to qualify for a second home mortgage | Financing | FAQs
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The minimum down payment for a second home is typically 10%, although some lenders may require 15–20%.
In addition to the minimum down payment, you'll need to show your lender that you have a strong credit score, a low debt-to-income ratio, a stable employment history, and enough savings to cover your mortgage payments in case you temporarily lose your income.
The best way to determine whether you're financially prepared to buy a second home is to talk with a lending professional. A lender will explain your options and help you determine how much you need to have saved to purchase a new home.
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Why buy a second home?
While staying in a hotel on vacation might feel exciting and luxurious, it's certainly not cost effective — particularly if you're traveling to the same place on a regular basis.
If you find yourself heading for the beach, mountains, or country every weekend (or even every month or so), it might be time to consider purchasing a second home.
A second home isn't just a place to kick back and relax — it's also a sound investment. Many people choose to turn their vacation homes into rental properties (using services like Airbnb, VRBO, and Home Away) to generate supplemental, passive income.
That said, before you take the leap and buy your second home, think through all the costs and risks associated with that decision. One of the first things you need to determine is how much to save for the down payment.
Primary residence mortgages vs. second home mortgages
When you buy your first home, you have several low-cost financing options available to you. Depending on your situation and goals, you can find mortgages that require down payments as low as $0 or 3.5%.
However, the down payment for your second home is different. You'll likely have to put 10% to 20% down upfront, depending on your lender and credit profile.
Taking out a second mortgage creates greater financial strain for homebuyers and increases lender risk, which is why you can expect the down payments between your first home and your second to differ.
Credit score requirements are also higher for second homes than they are for primary homes. For a primary mortgage, you need a credit score of at least 620. For a second home, Fannie Mae sets the minimum credit score at 640, but only when buyers provide a down payment of 25% or more. Most buyers will want to aim for a credit score of 700 or above to receive financing for a second home.
Second home vs. investment property
A second home is a property that a buyer intends to live in at some point during the year or visit regularly.
An investment property is purchased expressly to generate income or increase tax benefits. Residential investment properties are usually occupied by tenants for most of the year.
Lenders treat an investment property differently than a second home. Because an investment property is purchased to generate wealth and comes with tax benefits, it typically has a higher interest rate and requires a larger down payment than a second home.
How can I qualify for a second home mortgage?
Lenders look for homebuyers who are financially secure and capable of taking on a second mortgage. To qualify, you need:
- A minimum credit score of 640. This is a general rule of thumb, but check with your lender for their requirements.
- A debt-to-income ratio of 43% or less. Your DTI ratio shows lenders that you don't owe more than you make. To calculate it, add up all of your monthly debt payments, then divide that number by your gross monthly income.
- A 10–20% minimum down payment. You'll likely have to put down at least 10%, but certain loans and lenders may require a higher down payment.
- Cash in reserve. You need enough cash saved to cover your mortgage payments in case of unexpected or temporary loss of income. Plan to have at least one to two months of reserve cash in a place you can easily access, like a savings account.
- Proof of income. Your lender will likely ask for a W2, recent paystubs, or a letter from your employer to verify your employment status.
- A stable employment history. Most lenders want to see that you've been employed for at least the past two years without a gap.
How can I finance a second home?
You can finance your second home with these options:
- Reverse mortgage: This government-sponsored loan allows home buyers who are over 62 years old to use the equity of the home as a source of income. Buyers don't have to repay the loan until they leave or sell the home.
- Home equity financing: You can use a home equity loan (where you take the money upfront and make principal and interest payments over a set term) or a home equity line of credit (HELOC) (where you use the home's equity like a line of credit).
- Loan assumption: This option allows you to take over the mortgage loan payment of the seller and clear their dues at a low interest rate.
- Cash-out refinance: You can refinance your mortgage loan for more money. This is a good option if you get a lower interest rate than your initial rate.
- 401(k) loan: With this type of loan, you can borrow money from yourself and repay the amount in monthly installments.
Other considerations for buying second homes
A second mortgage isn't the only cost buyers should consider when looking to purchase another home. Buyers can expect to pay more in both interest and property tax. They may also have costlier homeowner's insurance.
Additionally, that second home will require as much TLC as your first. Utilities and other upkeep costs will take an additional bite of your month-to-month income.
7 useful second home buying tips
- Don't be an impulsive buyer. Make sure you have the finances and the commitment that a second home requires.
- Decide how you want to use a second home. Do you want to make it a rental vacation home or do you want to use it as your retirement home?
- Assess different areas and home types before buying a property.
- Hire a local real estate agent to help you find good deals, negotiate the home price, connect with contractors, and more.
- Don't settle for the first mortgage lender you find. Shop around and see what rates other lenders are willing to offer.
- Take into account the additional expenses that come with owning a home, such as maintenance, insurance, and utilities.
- Explore the tax benefits of a second home. Even though you can't deduct the rental income from your tax liability, you can deduct expenses such as cleaning, construction, and maintenance.
FAQs about a minimum down payment for second home
No, most buyers don't need to put 20% down on a second home. But keep in mind that down payment requirements vary based on lender and credit profile.
Getting a loan for a second home may be harder than getting a loan for a first home. Lenders set higher standards for second-time buyers. That said, the prepared homeowner will find the loan process smoother and simpler.
Fannie Mae requires that homeowners provide at least a 10% down payment for second homes.
A conventional loan requires buyers to provide a down payment of at least 10%. For multi-unit homes, you may need to provide a down payment of 15%.