Buying a second home offers both a getaway and potential income, but the rules for a second home mortgage differ from your primary residence.
A second property can serve as a personal escape, allowing you to skip costly hotel stays during vacations. Additionally, if you rent it out, the rental income could potentially cover your mortgage costs, making the investment financially rewarding.
Before you jump in, though, you should understand the second home mortgage requirements. They’re a little different from the mortgage on your main home. Here’s what you need to know.
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A second home mortgage is a loan used to finance the purchase of a secondary residence, such as a vacation home, that the borrower intends to occupy for part of the year.
An interesting aspect of second home mortgages is that you might be able to rent the property out when it’s not in use. However, rental periods are typically limited to 180 days annually, and the potential rental income cannot be factored into your mortgage qualification criteria.
Unlike your current home, a second home is not the dwelling you primarily live in, but it’s a property that you can use in various ways, either as a getaway spot, a secondary living space, or even as an additional stream of income.
When it comes to the function a second home can serve, the sky’s the limit, but generally speaking, they fall into three primary categories:
Rental homes and vacation properties are financed differently. If you can qualify for your purchase without the property generating any income, buy it as a vacation home. You’ll get a better mortgage interest rate, and qualifying is more straightforward when rental income is off the table.
However, if you need to rent out your place to afford it, your purchase becomes an investment property rather than a second home.
In this case, your mortgage lender will want to see an appraisal with a comparable rental schedule. This document tells the underwriter the property’s potential income. The lender counts 75% of the anticipated rent as income to you, and the monthly mortgage, taxes, and insurance are added to your expenses when calculating your debt-to-income ratio (DTI).
Investment property mortgages often require at least 20% down because it’s very difficult to get mortgage insurance for these purchases. Investment property mortgage rates can be 50 basis points (0.5%) or higher than rates for primary residences.
Second home mortgage rules are a bit stricter than primary home loans. Fannie Mae and Freddie Mac — the two agencies that set conforming loan guidelines — have requirements for both the borrower and the home being purchased.
The most important requirement for a second home loan is that you need at least a 10% down payment. This rule is non-negotiable.
Beyond the down payment rule, guidelines for second home mortgages can be flexible. Borrowers may be approved with:
If one area of your application is weaker, you can often compensate by being strong in others. For example, if your credit score is right at 640, you may get approved by making a bigger down payment. Or, if you have a high debt-to-income ratio, you could make up for it with an excellent credit score and 12 months of cash reserves in the bank.
Thanks to this flexibility, it’s possible to qualify for a second home mortgage even without perfect credit or a big down payment.
To qualify for a second home mortgage, the property itself must meet specific criteria set by lenders. These requirements ensure that the property is indeed a second home and not an investment property. The property must be:
Understanding and meeting these property requirements is essential to qualify for a second home mortgage and secure the best possible loan terms.
You can’t finance a property using a second home mortgage and then rent it out full-time. To qualify for a second home mortgage, you must occupy the property for a portion of the year. Why? Because if you plan to rent the home full time, it’s considered an investment property — not a second home. Investment property loans have higher interest rates and different loan requirements.
In addition, lenders typically require that the second home be located a certain distance away from your primary residence. Properties located too close to your main home may not qualify as a second home in the eyes of lenders. It also helps if the house is in a resort community or area. In short, the property must “feel” like a recreational residence, not a rental property posing as one.
You can buy a primary residence with just 3% down in many cases. But it takes a 10% down to buy a vacation home — and that’s if the rest of your application is very strong (high credit score, low debts, and so on).
If you have a lower credit score or higher debt-to-income ratio, your mortgage lender may require at least a 20% down payment for a second home. A down payment of 25% or higher can make it easier to qualify for a conventional loan.
If you don’t have a lot of cash on hand, you may be able to borrow your down payment using a cash-out refinance on your primary home or, alternatively, a home equity line of credit or HELOC.
When you buy a vacation property, you’ll likely need cash reserves, which are extra savings that could cover your mortgage payments in case of a short-term income disruption.
Credit score requirements are slightly higher for second homes than for primary residences. Fannie Mae sets its minimum FICO at 620 for primary home purchase loans. But a second home loan backed by Fannie Mae requires a minimum credit score of 640 — and that’s with a 25% down payment and DTI below 36%.
If you make a down payment of less than 25%, you typically need a credit score of at least 680 and low debts, or 720 with a higher debt-to-income ratio. Credit score requirements can also vary by lender so shopping around may help you find more lenient requirements.
Debt-to-income ratio requirements depend on your down payment size and credit score. Fannie Mae allows a DTI up to 45% with a 660 FICO score and at least a 25% down payment. A 45% DTI means your total monthly payments add up to 45% of your gross monthly income.
Unlike investment properties, you cannot use future rental income to help you qualify for a vacation home. You have to qualify with income from sources other than the property you are purchasing. If you’re buying a multi-unit vacation home, lenders will almost always treat your purchase as an investment property, whether or not you plan to rent it out.
It’s common to get a mortgage for a second home. Over half of all second home buyers use a mortgage rather than paying cash. When financing a second home purchase, borrowers have several mortgage options to choose from, including:
FRMs have an interest rate that remains constant throughout the life of the loan, providing predictable monthly mortgage payments. This stability makes budgeting easier for second home buyers.
ARMs start with a lower interest rate than fixed-rate mortgages, but the rate can fluctuate over time based on market conditions. Adjustable-rate mortgages may be attractive to buyers who plan to sell their second home within a few years or who expect their income to increase significantly in the future.
Jumbo mortgages are designed for luxury second homes where the purchase price exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. These loan types often have stricter qualifying requirements and may have higher interest rates than conforming loans.
With an interest-only mortgage, borrowers pay only the interest portion of their mortgage payment for a set period, typically 5–10 years. This can result in lower monthly payments initially, but the payments will increase once the interest-only period ends and the loan principal must be repaid.
The U.S. government doesn’t sponsor loans for vacation homes since government-backed loans are meant to encourage single-family homeownership. However, if your seller already has a government-backed loan against the property, you may be able to assume the seller’s loan.
In addition to the monthly mortgage payment, second home buyers should be prepared for the following costs:
Interest rates for second home mortgages are typically 0.25–0.50% higher than those for primary residence loans. As with your main home, it pays to shop aggressively for your best mortgage rate. Compare offers from at least three to five different mortgage lenders, and remember to look at their fees and annual percentage rates (APR) as well as the quoted mortgage rates.
Closing costs for second home purchases usually range from 2–5% of the loan amount and may include appraisal fees, title insurance, and origination charges. These costs are in addition to the down payment, which is typically 10–20% of the purchase price.
Borrowers who put down less than 20% on a second home may be required to pay PMI, which protects the lender in case of default. PMI premiums are added to the monthly mortgage payment and can range from 0.5 to 1.5% of the loan amount annually.
In addition to the upfront costs of purchasing a second home, buyers should also budget for recurring expenses such as property taxes, homeowners insurance, HOA fees, utilities (electricity, water, gas, and internet/cable), and maintenance costs (landscaping, cleaning, and repairs). These expenses can add hundreds or even thousands of dollars to your monthly budget, so it’s crucial to factor them into your long-term financial planning to ensure that you can comfortably afford the ongoing costs of second home ownership.
Applying for a mortgage for a second home is similar to applying for a primary residence mortgage, but there are a few key differences to keep in mind. Follow these steps to streamline your application process:
Before applying for a second home mortgage, establish a clear budget that accounts for the purchase price, down payment, closing costs, and ongoing expenses. This will help you determine the loan amount you need and ensure that you’re not overextending yourself financially. Use a mortgage calculator to estimate your monthly payments and assess how a new home purchase fits into your personal finance goals.
Lenders typically require higher credit scores for second home mortgages compared to primary residence loans. Check your credit score and take steps to improve it if necessary, such as paying down debt, disputing errors on your credit report, and making all payments on time.
Prepare the necessary documentation for your second home mortgage application, which may include:
Keep in mind that the IRS has specific rules regarding the classification of second homes for tax purposes.
Compare mortgage rates, fees, and terms from multiple lenders to find the best deal for your second home purchase. Consider working with a mortgage broker who can help you identify competitive offers from a wide range of lenders.
Obtain a mortgage pre-approval from your chosen lender, which will give you a clear idea of how much you can borrow and demonstrate to sellers that you’re a serious buyer. Keep in mind that pre-approval is not a guarantee of final loan approval.
Once you find the perfect second home, make an offer and provide earnest money to show your commitment to the purchase. Your real estate agent can guide you through the negotiation process and help you craft a competitive offer.
Your lender will typically require an appraisal to ensure that the second home’s value aligns with the loan amount. Additionally, consider scheduling a home inspection to identify any potential issues with the property before finalizing the purchase.
After your offer is accepted, work with your lender to finalize your loan application and lock in your second home mortgage rate. Review and sign the closing documents, pay any remaining closing costs, and take possession of your new home.
By following these steps and working closely with your lender and real estate agent, you can navigate the second home mortgage application process with confidence and efficiency..
While a second home mortgage is a popular method of financing, it’s not the only option. If you’re a first-time buyer of a second home, or you have significant equity in your primary residence, consider the following alternatives.
A cash-out refinance involves replacing your existing primary mortgage with a new one, while also borrowing more than you currently owe. This extra cash, released from the equity you’ve built up in your primary home, can then be used towards your second home. However, this will increase your overall mortgage balance and potentially result in higher monthly payments.
These are loans against the equity you’ve built up in your primary residence. Home equity loans can provide a lump sum of money that can be used for the down payment or even to cover the full cost of the second home. However, they typically come with higher interest rates than first mortgages. Keep in mind, your lender will use your first home as collateral. So you risk foreclosure of your home, should you be unable to repay the second mortgage.
A home equity line of credit (HELOC) provides a flexible financing option to borrow against the equity of your primary residence. It functions similarly to a credit card; you have a specified credit limit and can borrow up to this amount. As you repay the borrowed sum, your credit line is replenished. HELOCs offer a useful way to generate funds for your second home but come with risks, as they are secured against your primary residence.
A second home mortgage is a specific type of loan you obtain when buying a second home, whether it’s a vacation or a secondary residence. These mortgages differ from those for primary homes or investment properties, mainly due to lenders’ risk assessments.
What are the requirements for a second home mortgage?To be eligible for a second home mortgage, the property must be a single-unit dwelling fit for year-round use that you have exclusive rights to. Typically, the property should also be located a certain distance away from your primary residence.
Can I use rental income to pay for my second home mortgage?Generally, you can’t count anticipated rental income to meet eligibility criteria when buying a second home mortgage. However, if you decide to rent the property out, you can use this income to indirectly cover your monthly mortgage payments, keeping in mind that rental duration is often limited to maintain the property’s status as a second home.
How does a second home mortgage differ from an investment property mortgage?The main distinctions lie in the property’s intended use and the loan conditions. A second home is mainly for personal use, while an investment property is geared towards generating income or capital gains. Investment property mortgages usually have higher interest rates and more stringent qualifications.
Can I refinance my primary residence to fund a second home?Yes, when buying a second home, you have the option to leverage the equity in your primary residence through either a cash-out refinance or a Home Equity Line of Credit (HELOC). However, these methods come with their own sets of risks and rules, so it’s advisable to consult with a mortgage expert.
Borrowers will pay slightly higher rates to finance a second home than they will for a primary residence. To make home buying even more affordable, shop around for rates with at least three mortgage lenders. You probably wouldn’t buy the first vacation home your real estate agent showed you. Loan shopping should work the same way.
Make sure your loan officer knows you’d like to finance your purchase as a vacation home and not an investment property. Get a quote for your vacation home purchase and be sure to shop around to get your best rate.
Don’t think you can qualify to buy a second home? You might be surprised.
Authored By: Gina Freeman The Mortgage Reports contributorWith more than 10 years in the mortgage industry, and another 10 years writing about it, Gina Freeman brings a wealth of knowledge to The Mortgage Reports as its Associate Editor. Gina works with a team of world-class real estate and finance writers to bring timely and helpful news and advice to the audience. Her specialty is helping consumers understand complex and intimidating topics.
Updated By: Ryan Tronier The Mortgage Reports EditorRyan Tronier is a personal finance writer and editor. His work has been published on NBC, ABC, USATODAY, Yahoo Finance, MSN Money, and more. Ryan is the former managing editor of the finance website Sapling, as well as the former personal finance editor at Slickdeals.
Reviewed By: Paul Centopani The Mortgage Reports EditorPaul Centopani is a writer and editor who started covering the lending and housing markets in 2018. Previous to joining The Mortgage Reports, he was a reporter for National Mortgage News. Paul grew up in Connecticut, graduated from Binghamton University and now lives in Chicago after a decade in New York and the D.C. area.