Anyone interested in a relaxing vacation home for their family will likely need a new conventional mortgage for their second home.
However, mortgages for second homes have different procedures and requirements than for a primary residence mortgage.
The National Association of Realtors, in fact, created a special certification for real estate agents who buy and sell second homes and vacation homes for their clients. That special certification shows how specialized the market can be for second homes.
At AAA Banking, we want to help homebuyers understand what it takes to purchase a second property and answer the important questions you might have, including:
- What are the eligibility requirements?
- How do the down payment and loan terms differ from my primary home?
- What is the difference between a second home and an investment property?
- And most importantly, how can I determine if a second home is the right financial move for me?
So, let’s dive in and take a look!
Second home vs. investment property
So what makes the difference between a home you use as a second home versus one you plan to use as an investment property?
A second home is a property you buy in addition to your primary home to live in for at least part of the year.
For the second property to be considered a second home, lenders often require proof that its location is a minimum of 50 miles distance from your current residence.
A lender might also require that the second home is a single-unit dwelling that isn’t subject to any timeshare requirement.
The IRS, on the other hand, defines a second home as a property you will be living in for more than two weeks (14 days) a year or 10% of the total days you might rent it to others.
Other common terms for second homes include:
- A vacation home
- Some call them “pied-à-terres.”
- A residence used for work
Alternatively, investment properties are used to earn rental income—or fix and flip them to sell for profit.
The primary purpose of an investment property is to generate income and, frequently, use it as a long-term wealth strategy through regular occupancy.
Investment properties can be more than one unit—multiple units are common. Rental properties can also include commercial properties.
Down payment requirements for a second home mortgage
With your primary home loan, you might be able to get approval with as little as 5% down.
However, you’ll likely need to offer at least 10% for a second home.
Regardless of its purpose, any second property is considered a further financial strain for a borrower.
Your mortgage rate, of course, will depend on your credit score and other factors.
Credit scores and mortgage rates
Lenders will typically prefer a slightly higher credit score for your “new home away from home.” You will also likely be charged a higher interest rate than your first mortgage.
That added expense to your financial portfolio, big or small, makes any second property a slight increase of risk for the lender. The mortgage rate on the second home will tend to be higher to offset that risk.
Besides the higher mortgage interest, qualifying for a second home mortgage is similar to any conventional loan process. So next, let’s take a deeper look into that process.
Conventional loan qualifications for a second home mortgage
Before applying for a vacation home or second home mortgage, it’s best to review your own financial health to see what the mortgage lender will be reviewing.
Your standard income needs to be sufficient to cover the new second mortgage payments and your current mortgage.
Ideally, you should also have reserve savings to cover at least two months in case of a temporary loss of income. Less qualified applicants might require six months of savings.
Your debt-to-income ratio (DTI) requirements for your second home mortgage will likely depend on your credit score and your down payment amount.
In general, the larger your down payment and the higher your credit score is, the greater likelihood a lender will allow a higher DTI.
Some homeowners choose to offset expenses by renting out their vacation homes while not using them. This, however, might violate their mortgage terms since they’ve converted the second home into an investment property.
Financing a second home
Beyond the minimum 10% down payment rule, the guidelines for second home mortgages can vary.
Most lenders follow these requirements:
- A 680 or higher credit score (typically)
- A down payment of 25% or more if you have a credit score of 640 to 679
- A max 45% debt-to-income ratio (DTI)
If part of your financial health is weak, the flexibility of conventional loans allows you to compensate by strengthening other aspects of your offer.
For example, if you have a minimum credit score of 640, you may still be approved by offering a larger down payment.
Conversely, if your credit score is excellent, but your DTI is high, you could compensate by having a full year of cash reserves available.
Is a conventional loan for a second home a good option for you?
Before making that second home purchase or any significant step towards homeownership, you must do some due diligence.
The best first step is to add up all the big and little costs.
Apart from your monthly mortgage payments and down payment, it’s best to consider the following:
- Closing costs
- Mortgage insurance (PMI)
- Homeowners insurance
- Travel costs
- Property taxes
And, of course, you can’t forget the costs associated with your current home.
Some borrowers use mortgage calculators to help find out what the bottom line might be. Those results might also depend on choosing a fixed rate or adjustable-rate mortgage.
The next best step to your second home
The next best step is to get professional advice about your options.
If you want a knowledgeable and supportive financial partner, AAA Banking can be much more than just a name on the top of a mortgage application. We want to be there when you need us.
There are times when buying property can be a stressful endeavor. At AAA Banking, we care about your emotional well-being as much as your financial and physical health. We want to be a trusted ally who will always give their best.
If you are looking to purchase a second home but don’t want to spend your way out of that vacation home, you couldn’t ask for a better partner than AAA Banking.
Contact one of our loan officers today. Conversations are free, and they could be the key to your new home.