Alternative Investments Real Estate Investing. Table of Contents Expand. Second Home Financing Options. Option 1: Cash. Option 2: Home Equity Loan. Option 3: Conventional Loan. The Bottom Line. Key Takeaways When considering buying a second home, make sure you not only have the money for the monthly mortgage and interest payments, but also for property taxes, homeowners insurance, utilities, and other assorted fees.
FHA-insured loans are great for when you're buying your principal residence, as they allow a small down payment and a middling credit score, but you can't use them for second homes. Instead, consider paying for your vacation home in cash, or by getting a home equity loan on your principal residence, if possible. Consider applying for a standard loan for your vacation home; however, be prepared to pay a larger down payment, more interest, and comply with stricter requirements than for a mortgage on your primary residence.
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You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Related Articles. Partner Links. If a borrower defaults, the FHA pays the lender. Defining First-Time Homebuyer A first-time homebuyer is someone who is buying their first home. FHA k Loan An FHA k loan provides money for purchases, repairs, and other related expenses for individuals who want to buy and rehabilitate a damaged home.
Cash-Out Refinance This mortgage-refinancing option—the new mortgage is for a larger amount than the existing loan—lets you convert home equity into cash. Use it with care. What Is a Mortgage? A mortgage is a loan typically used to buy a home or other piece of real estate for which that property then serves as collateral. But 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 for it by being strong in other areas. For instance, if your credit score is right at , you may get approved by making a bigger down payment. You yourself need to stay there for part of the year. It also helps if the house is in a resort community or area.
This is possible using a cash-out refinance or a home equity line of credit. When rates are low, a cash-out refinance could have the double benefit of covering your second home down payment and lowering the interest rate on your primary home loan. The U. Your loan of choice will probably be a conventional non-government loan, such as those underwritten by standards set out by Fannie Mae and Freddie Mac.
Reserves are funds available to pay your mortgage if you experience an interruption in income. One month of reserves is equal to the amount of money it would take to make one monthly payment on both your primary residence and future second home. Credit score requirements can also vary by lender.
Debt-to-income requirements depend on the size of your down payment and your credit score. That includes your primary mortgage payments, second mortgage payments, auto loans, and other ongoing debts. Unlike investment properties, vacation homes have no rental income to offset the mortgage payment.
You have to qualify with income from sources other than the property you are purchasing. Compare offers from at least different mortgage lenders, and remember to look at their fees and annual percentage rate APR as well as the quoted mortgage rates. To make sure you qualify in the first place, take a look at your assets, credit, and income — like an underwriter will. Owning a second home comes with extra responsibility. So plan carefully.
Mortgage underwriters only look at expenses for principal, interest, property taxes, insurance, and, if applicable, HOA dues. If these expenditures check out, they approve your loan. You must consider travel costs, regular maintenance, repairs, utilities, furnishings, and household items.
If the second home is far away , will you need to pay someone to maintain it for you? You might be able to offset some or even all of these costs if you rent your home part-time. But second home mortgages require you to occupy the home at least part of the year. 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.
However, if you need to rent out your place to afford it, your purchase becomes an investment property rather than a second home. However, if you want an investment property, you should look for a tenant-friendly neighborhood with reputable schools, a robust job market, and affordable monthly rent.
Obtaining mortgage pre-approval lets you see how much you can borrow. It also provides you with an estimate of your monthly mortgage payment to help you stay within your budget. Once pre-approved, you can compare different mortgage loans.
A real estate agent can make the house hunting process a lot easier. For instance, a good agent can:. Ask your family and friends if they can refer you to a real estate agent. You can also interview several agents to get a feel for their personalities, working styles, and level of experience.
To find a second home that best fits your needs, take the time to tour properties and pay attention to the following:. Your agent can help you create the offer and negotiate any contingencies. Once the seller accepts your offer, your lender will conduct an appraisal and review your finances to complete the financing process.
There are several upfront and recurring costs , such as closing costs and property taxes, that can eat up a significant portion of your budget.
The amount of the sales price you finance determines your monthly interest and principal payment. Depending on your location, the property taxes for part-time residents can be different than what full-time residents pay. Homeowners insurance is another cost to factor into your budget. The lender will create an escrow account for your insurance and property taxes and use the funds from it to pay those bills on your behalf.
Your tax preparer can help you navigate the reporting process. One downside of buying a second house is having to maintain two properties. You may need to make some upfront repairs and renovations before you or a tenant occupies the home. Short-term rentals will require cleaning between guests. Visiting your second home requires time and money.
You must decide if the commute is worth the potential benefits.
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