Second Home Mortgage: Requirements, Costs, and How to Apply

Buying a second home is an exciting opportunity, allowing you to enjoy a retreat from everyday life and potentially generate rental income. But financing that purchase with a second home mortgage comes with its own challenges that are unique from a mortgage for a primary residence.

A second home mortgage is not the same as a mortgage for a primary residence. You’ll need to meet stricter qualification criteria and you could face higher interest rates. Being prepared will maximize your chances of approval.

We’ll look at what makes second home mortgages different, how much they cost, and how you can finance the purchase of your second property.

Second home mortgage requirements

Lenders treat second home mortgages differently than conventional mortgages for primary residences. This is because of the risk involved. Whereas a primary residence is a necessity, a second home is usually seen as a luxury, so the risk of defaulting on a second home mortgage is higher.

As a result, you’ll need to meet stricter qualification criteria when applying for a second home mortgage. These requirements include:

• Minimum credit score of 640-700+
• Debt-to-income ratio of 43% or lower
• Cash reserves to cover 2-6 months of mortgage payments
• Down payment of 10-25% (20%+ preferable)
• Bank statements
• Tax returns from the last two years

How to apply for a second home mortgage

Applying for a second home mortgage is similar to applying for a mortgage for a primary residence. Generally, the process looks like this:

1. Ensure you meet the requirements: If you don’t have enough for a down payment or your credit score isn’t high enough, focus on improving your financial situation first.
2. Gather paperwork: Lenders have higher standards for second home mortgages, so bring tax returns and other proof of income to show you have the necessary funds.
3. Compare lenders: Just as with a primary residence, you’ll get the best rates by comparing different lenders. Most lenders that provide mortgages for primary residences will do so for second homes as well.
4. Get preapproved: Preapproval will give you an idea of how much you can spend on your second home. Preapproval also reduces the risk of your offer falling through.
5. Negotiate an offer: When negotiating with sellers, work with a realtor who’s familiar with the market. An inspection contingency is essential, especially for second properties that may be exposed to wildlife and natural disasters.
6. Get your loan approved: Once your offer is accepted, you’ll enter the underwriting process for getting your loan approved. An appraisal will be ordered after you apply and go under contract . 

How much does a second home mortgage cost?

A second home mortgage is a major financial commitment, so you’ll want to make sure you have the budget for it. Understanding all of its costs will ensure your financial situation isn’t strained.

Meeting down payment requirements

Second home mortgages have higher down payment requirements than conventional mortgages. The minimum down payment for a second home is usually around 10%, but many lenders prefer down payments of at least 20%. The higher down payment amount reduces the lender’s risk while also ensuring you have more equity in your home early on.

While a large down payment is harder to save up for, it will help you financially over time. Larger down payments reduce your monthly mortgage payments and, if they’re over 20%, they eliminate the need for private mortgage insurance. However, you’ll still want to make sure you have enough cash reserves for emergencies and other financial goals.

Understanding interest rates

Second home mortgages often carry higher interest rates than mortgages for primary residences. Typically, second home mortgage rates are about 0.125% to 0.5% higher than for primary residence mortgages.

While that difference may seem modest, it compounds significantly over the life of a 15- or 30-year mortgage, adding thousands of dollars to your overall costs. That’s why you should shop around for the best rate as even a small difference can significantly cut costs in the long run.

Other costs of owning a second home

Beyond your mortgage payments, you’ll also need to factor in other costs of owning a second home. Unfortunately, second home expenses are not always the same as what you may be used to with your primary residence. For one, property taxes may be higher, especially since second homes don’t qualify for homestead exemptions.

Insurance is another big consideration. Home insurance tends to be more expensive for homes that aren’t occupied year-round or for homes that are rented out for part of the year. If you buy a vacation home in a high-risk area, such as coastal areas, wildlife zones, and forest fire areas, your insurance costs will likely increase.

Finally, maintenance and management are major expenses with owning a second home. Rural properties exposed to the elements may require significant upkeep. You may also have to pay for property management services or resort fees depending on where your second home is located.

Financing your second home purchase

You have options when choosing how you want to finance the purchase of your second home, from conventional mortgages to equity-based strategies. Here are the top options to consider and their benefits and drawbacks.

Conventional mortgages

Best for: Most borrowers with good credit

Conventional mortgages are by far the most popular way of financing a second home purchase. This mortgage type has the advantage of being widely available and familiar to most borrowers who have already purchased a home using a mortgage in the past.

As with a primary residence mortgage, conventional loans for secondary homes are usually available with 15- or 30-year terms and with either fixed or variable rates. Because most lenders offer them, it’s easy to shop around for the best rate.

However, conventional second home mortgages require you to have good or excellent credit, often exceeding what you’d need for a primary residence. If you’re self-employed or your income comes from non-traditional sources, you may have trouble getting approved.

Alternative financing for unique situations

Best for: Self-employed borrowers with sufficient assets

If you’re self-employed or your income situation is complex, alternative financing, like portfolio loans or bank statement loans, may be more appropriate although these are typically only used to finance investment properties. These are home loans that lenders don’t sell to government-sponsored entities but rather keep in-house. As a result, qualification criteria are more flexible and don't have to meet government regulations.

Because of this flexibility, lenders can rely more on factors aside from your employment status to determine your mortgage eligibility. For example, instead of tax returns, the lender may put greater emphasis on your history of deposits with them.

However, these options are difficult to get as you’ll still need to show that you’re able to pay back the loan even without a conventional income source. Plus, rates may be higher depending on your circumstances.

Equity-based financing

Best for: Borrowers with lots of equity

If you’ve built up equity in your current home, you can use that equity to take out a home equity loan or a home equity line of credit (HELOC). These credit options use your current home as a security and they may offer better rates and terms than you’d get with a conventional mortgage.

A HELOC, specifically, gives significant flexibility. You can withdraw funds only as needed, which in turn means you’ll only pay interest on the amount withdrawn.

However, equity-based financing is risky. You’ll dramatically increase your overall leverage and tie both your primary residence and secondary home together. If you default on your second home loan, you risk losing your primary residence.

Government-backed loans

Best for: Qualified borrowers relocating for a job

Government-backed loans, such as FHA, VA, and USDA loans are very rarely eligible for second homes, but there are some limited exceptions. For FHA loans, if you’re relocating because of a job offer, then you may qualify if you are establishing a new primary residence.

The advantage of government-backed loans is that they usually have lower down payment requirements and lower qualification requirements.

However, these programs are primarily designed for primary residences. Using them for a second home is rare and you’ll need additional documentation to qualify. You may also be required to transition your second home to your primary residence and sell your first house.

Second home mortgage vs. investment property

A second home mortgage is different from a mortgage for an investment property. These differences are important to understand as they affect qualification criteria and costs.

Intended use requirements

A second home mortgage must be primarily used for your own personal use by you and your family. Investment properties, on the other hand, are primarily income generators, with personal use being minimal or non-existent.

Many lenders have a minimum number of days that property must be personally used to qualify as a second home. Usually this minimum is around 14 days and lenders may monitor property usage or require periodic certification about how you’re using it.

Misrepresenting your second home as being for personal use when it is in fact for generating rental income can have serious consequences. These can include being required to pay off the loan faster or even facing fraud charges.

Financial requirements and usage

Mortgages for investment properties also typically require larger down payments than second home mortgages do. For an investment property, you should expect to put down at least 20-25%. Additionally, you’ll likely have to pay a higher interest rate.

These stricter requirements reflect the fact that investment properties are higher risk for lenders. Rental income could fall because of market fluctuations, extended vacancies, and difficult tenants. In contrast, a second home is not expected to generate income.

Switching from second home to rental income

If you originally bought a property intending to use it as a second home but now want to generate rental income from it, you should look into transitioning your mortgage. Your lender may allow you to transition to a new mortgage, although your terms and rates will likely change.

You may also want to consider renting out your first home instead and using your second home as your primary residence. Again, you’ll need to talk to your lender, especially if you still have a mortgage on your first property.

Alternatively, you may be able to refinance your mortgage into an investment property loan. When transitioning from a second home to investment property, you’ll also need to change your insurance policies as well.