Guide to Buying a Second Home

Learn the Requirements for Buying a Second House

There are many reasons why you might be considering a second home. Perhaps that dream vacation house is finally within reach, or you’re interested in creating rental or investment income. You may even plan for your second home to eventually become your new primary residence and you’ll rent out your current one. Although the process of buying a second home is similar to buying your first home, the requirements can be stricter. Understanding these differences can help you move forward with confidence and make the decision to buy a second home rewarding.

Common Reasons to Buy a Second Home

Many people consider purchasing a second home for a wide range of personal, financial, and lifestyle reasons. Below are some common motives that make buyers interested in a second property.

• Investment in real estate: Buying a second home as an investment can help diversify your financial portfolio while building long-term equity.
• Rental income: A second home can be used as a rental property, which can be rented out full-time or seasonally, to help generate additional income (as well as offset mortgage and maintenance expenses).
• Vacation home: Some buyers want a dedicated getaway spot they can enjoy throughout the year (while also benefiting from the property’s increase in value).
• Commuter location: A second home near work or in a frequently visited city can help reduce travel time and increase day-to-day convenience.
• New primary residence: Some buyers purchase a second home with plans to eventually make it their main residence, especially when preparing for relocation or retirement.

Your intended use of the home can also influence which financing options you qualify for. For example, some government-backed loan programs require the property to serve as your primary residence.

Considerations for Owning Two Homes

Owning two properties comes with unique responsibilities and costs. Here are some key considerations to keep in mind as you determine whether a second home is the right choice.

• Second mortgage: Taking on an additional mortgage can affect your debt-to-income ratio (DTI) and budgeting. Make sure you are financially prepared for the new payment to affordably fit into your finances.
• Additional costs: Things like insurance, utilities, property taxes, and potential HOA fees can add up quickly when managing two homes.
• Maintenance and upkeep: A second home requires regular maintenance, repairs, and seasonal care, which can be a challenge if you aren’t on-site regularly. You also could incur higher expenses if you need to hire people to maintain the property.
• Profit not guaranteed: Owning a second home doesn’t automatically mean extra income since you can’t guarantee always having responsible tenants to offset mortgage and maintenance costs. A return on your investment may also be difficult if you must invest more than planned toward repairs or renovations, or if housing values unexpectedly drop.

How to Qualify for a Second Home Mortgage

Compared to your first home’s mortgage, a second home will likely have slightly higher interest rates with stricter requirements for credit score, minimum down payment, and debt-to-income ratio (DTI). DTI is a percentage you’ll get by dividing your total monthly debt payments by your gross monthly income. Many lenders have a maximum DTI of 43% for conventional loans.

If you’re buying a second home while still making monthly mortgage payments on your primary residence, the cost of both mortgages will be included in your DTI. Look at this sample calculation:

In this example, the applicant has a DTI under the 43% maximum that mortgages typically require. Knowing your DTI is important because it affects whether you may qualify for a mortgage to buy a second home. It can also help you understand how much money a lender might be able to loan you for a second home.

Steps to Buy a Second Home

Buying a second home entails many of the same steps as purchasing your first property, but with some added financial considerations. Below are the main steps involved in getting a second home.

1. Review your finances: Evaluate your credit score, debt-to-income ratio (DTI), available savings, and overall budget to understand what you can comfortably afford.
2. Explore financing options: Explore preapproval, down payment requirements, and different loan programs to find the best financing solution for your situation.
3. Find the second property: Work with a real estate agent to identify homes that meet your criteria for price, location, amenities, and intended use.
4. Submit an offer: Negotiate terms with the seller, review contingencies, and finalize an offer you feel confident about.
5. Closing and move-in: Finalize mortgage paperwork, close on the home, and prepare for any upfront costs (repairs, renovations, etc.) associated with your new property.

Second Home Mortgage Options

Financing a second home differs slightly from financing a primary residence. Requirements are often more limited and may include higher credit standards or larger down payments. Here is a concise list of common mortgage types used when purchasing a second home.

• Conventional loans: These are the most common choice for second home mortgages. Conventional loans typically offer the most competitive interest rates but do have credit and minimum down payment requirements.
• Jumbo loans: If the home’s purchase price exceeds conventional loan limits, a jumbo loan may be necessary. These loans often require excellent credit, low DTI, and significant assets.
• Government-backed loans: While most government-backed programs are limited to primary residences, some scenarios may allow their use for a second home depending on eligibility and property-use rules. Some government programs can be used to purchase a second home if 1) the home is intended to be used as the buyer’s new primary residence and 2) the buyer doesn’t have an existing government-backed loan of the same type.

Always consider speaking with a Freedom Mortgage loan advisor to compare your options and choose the best second home mortgage for your needs.

How to Buy a Second Home FAQs

In this section, we’ve answered common questions buyers often have when looking into purchasing a second home.

Can You Deduct Mortgage Interest on a Second Home?

You may be able to deduct second home mortgage interest if the property qualifies and you itemize deductions on your tax return. However, limits and requirements apply, so it’s always best to confirm details with a tax professional.

Can You Get an FHA Loan for a Second Home?

FHA loans are generally restricted to primary residences, but there are rare circumstances, such as a change in household size or relocation, where exceptions may apply.

Are There VA Loans for Second Homes?

VA loans are designed for primary residences, but there are limited cases where eligible borrowers may use a VA entitlement for a second property.

Can a USDA Loan Be Used for a Second House?

USDA loans cannot typically be used to finance a second home because the program is focused on helping buyers secure primary residences in rural areas.

Final Thoughts: Getting a Second Home Mortgage

Purchasing a second home can be an exciting step, whether you’re seeking a vacation property, long-term investment, or future primary residence. Be sure to understand how you’ll finance the purchase, what additional responsibilities come with owning another property, and how the home fits into your long-term financial goals. If you’re ready to explore your options, you can get prequalified with us today.