With the real estate market cooling down, some Americans wonder how to buy a second home.
But, before looking at new homes, it’s essential to decide what you intend to do with your primary residence.
Popular options for many homeowners include keeping both properties and using one as a second home or vacation property or using the second property for additional income.
Before you decide what you do with multiple properties, let’s go over reasons to buy a second home, how to know if you can afford one and how to finance it.
What is considered a second home?
A second home is a property, in addition to your primary residence, where you reside for part of the year.
Second homes can be vacation homes, condos, townhouses, etc., located somewhere other than where your primary residence is located.
Second homes can also include a retirement property.
In general, your second property must be located a certain distance—usually 50 miles—from your primary residence to qualify for a second home loan.
Reasons to buy a second home
Many people use the phrases “second home” and “investment property” to mean the same thing.
When it comes to buying a second property, however, there are differences between the two property types, and the reasons to buy a second home will depend on what you’re hoping to do with it.
What is an investment property?
An investment property is a property that you don’t live in, and its primary purpose is to bring in money.
Common investment property types include residential rental properties (properties you plan to rent out), and “flip” properties, or “fixer-uppers” you intend to buy, fix up, and sell at a profit.
Can I afford a second home?
One of the first questions to ask yourself if you’re considering a new property is, “Can I afford a second home?”
A mortgage calculator can help potential borrowers determine the affordability of a second home and whether the additional mortgage payments are manageable.
How do I use a mortgage calculator?
Follow the prompts and simply plug in a few key pieces of information, like your total household income and monthly debts—including credit card debt, student loans, etc.
A mortgage calculator uses the information you provide to give you an estimate of what your monthly mortgage payments will be.
Ways to finance a second home
When it comes to funding, there are several ways to finance a second home.
Option 1: Cash
If you’ve been regularly adding to your savings account, you might consider paying cash for your second home.
An all-cash purchase is the most straightforward way to pay for a second home or vacation property.
Option 2: Cash-out refinance
A cash-out refinance can help you finance your second home purchase. With cash-out refinancing, borrowers can tap into the equity they’ve paid into their current home.
Cash-out refinancing requires borrowers to get a new mortgage loan for more money than they currently owe on their existing mortgage. Borrowers receive the cash difference between the new, bigger loan amount and their existing mortgage.
The “cash out” is limited to a maximum of 80% of your home’s value but is otherwise free of any restrictions. Borrowers can use the cash they receive for any purpose they choose, including purchasing a second home.
Option 3: Conventional Mortgage Loan
Conventional home loans remain a very popular choice for home purchases.
The National Association of Realtors 2022 home buyers survey found that 69% of all buyers chose conventional loans to finance their home purchases.
Because buying a second home is so specialized, the National Association of Realtors created a specific real estate agent certification for real estate agents selling second homes and vacation homes.
How do I apply for a mortgage for a second home?
Like your primary residence mortgage, you can get preapproved for your second home mortgage loan.
Mortgage pre-approval offers an accurate estimate of how much of a mortgage you qualify for and what mortgage interest rate you can receive.
What are second home mortgage requirements?
Because a second home is an additional financial burden to your budget, borrowers need to be able to show their standard monthly income is sufficient to cover the additional mortgage payments easily.
Having cash reserves totaling between three to six months of mortgage payments will demonstrate your ability to continue to make payments in the event of a financial emergency.
Many lenders require a maximum of 45%, but your credit score and down payment amount will impact the debt-to-income ratio (DTI) your lender will work with.
A general DTI rule of thumb is that the higher your credit score, the higher the DTI lenders are willing to accept.
Credit scores and mortgage rates
Lenders generally look for higher credit scores—680 or higher—when purchasing a second home.
And despite the higher credit score requirement, you’ll likely need to pay a higher mortgage interest rate than the one you received with your first mortgage.
A second home is considered a higher risk for the lender, and higher interest rates help mortgage lenders to offset that added financial risk.
Down payment requirements for a second home
Down payment requirements for conventional second-home mortgage loans differ from primary home loans.
You’ll likely need a minimum down payment equaling 10% of your second home’s purchase price for your second home.
If your credit score falls below 680, you’ll likely need a down payment of at least 25% of your home’s purchase price.
Second home as Airbnb or rental units
If you’re wondering how to buy a second home for Airbnb or how to buy a second home to rent, it’s important to speak with your lender.
Unfortunately, not all lenders consider rental income when qualifying for a home loan.
Some allow a partial or rental income percentage, while others require verifiable proof that your second home has been consistently rented.
Make an informed decision with AAA Banking
Getting accurate professional advice is crucial to making an informed decision about buying a second home.
At AAA Banking, we want to make sure you have the information you need to make the best decision for your family and your financial well-being.
Reach out to one of our trusted loan officers Monday through Friday (8:00 am to 8:00 pm EST) at (844) 793-1870. Let us put our years of experience to work for you.
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