What to know about buying a second home

Quick insights

• Understanding the different types of properties is critical when buying a second home. These include primary residences, second residences and investment properties. Each type has its own financial implications and mortgage requirements.
• There are several reasons you may choose to buy a second home such as using it as a personal retreat for vacations and getaways, having a secondary residence for frequent travelers or planning for retirement.
• The process of buying a second home involves several steps including defining your goals, assessing your finances to determine affordability, getting preapproved and closing.

Embarking on the journey of buying a second home is an exhilarating step, whether you’re dreaming of a serene retreat or a savvy investment property. However, this process typically involves navigating the complexities of a second home mortgage. A mortgage on a second home is different than a mortgage on a primary residence. Understanding the ins and outs can make all the difference in securing the ideal second property and ensuring a smooth transaction.

In this article, we will discuss how to buy a second home, second home mortgage requirements and saving on a down payment for a second home. By educating yourself, you can unlock the full potential of your property search and make your second home dream a reality with confidence and ease.

What is a second home?

A second home is a property that you purchase in addition to your primary residence, often used for vacations, tranquil getaways or as an investment. This could be a cozy cabin in the mountains, a sunlit beach house or a stylish city condo. When it comes to financing your new property, a second home mortgage comes into play. It’s important to understand the distinction between a primary residence, a second residence and an investment property.

• Primary residence: This is the home where you live most of the time and is considered your main dwelling. A primary residence typically offers the most favorable mortgage terms because loan providers see it as a lower risk. Your primary home often provides tax benefits, such as deductions on your mortgage interest and property taxes. Please consult with a tax professional to learn more.
• Second residence: This property is purchased in addition to your primary home. It is often used for vacations, seasonal stays or solely for personal enjoyment. While it’s not your main home, it’s still intended for personal use rather than rental income. Securing a second home loan generally requires a larger down payment and may have slightly higher interest rates compared to primary residence mortgages.
• Investment property: This is a property purchased specifically to generate rental income or appreciate in value. It could be a residential property such as a small multifamily unit or commercial property (office buildings, warehouses, etc.). Investment properties generally require a sizeable down payment and higher interest rates than mortgages for primary residences or second homes because they are seen as riskier by mortgage providers. The potential for rental income or resale value is a critical factor in securing and managing these types of properties. 

Each property type serves a different purpose and comes with its own set of financial implications and mortgage requirements.

Reasons to buy a second home

Buying a second home can provide many advantages to prospective homebuyers such as:

• Fun escape destination: A second home can provide a personal retreat where you can consistently enjoy vacations without the need for booking hotel accommodations. It can offer a comfortable environment for leisure, relaxation and quality time with your family and friends.
• Rental income: Renting your second home when you’re not using it can generate additional income. This could help you offset the costs of homeownership and potentially make the property more financially viable.
• Tax benefits: Homeowners who purchase a second home may be eligible for various tax advantages such as deductions on mortgage interest and property taxes. These benefits could help reduce the overall cost of owning a second property. Consult with a tax professional to learn more about the tax implications of owning a second home.
• Secondary residence for frequent travelers: If your job requires extensive travel, buying a second home could provide a stable base when you’re not on the road. It can offer convenience and comfort, enhancing work-life balance.
• Retirement: A second home can serve as a future retirement destination, providing a place to enjoy your later years in a preferred location. It allows you to gradually familiarize yourself with the area and plan for a smooth transition.
• Valuable financial asset: Beyond personal enjoyment, a second home could be a strategic financial asset. It can diversify your investment portfolio, potentially serve as a hedge against inflation and offer capital growth opportunities.

Can I afford a second home?

Before you make this major financial decision, you'll need to find out if you can afford a second home. First, add up all the costs. Not just the costs that go into the purchase, but the costs that might not be immediately obvious. These include your down payment and monthly mortgage payments, as well as closing costs, utilities, property taxes, insurance, landscaping, travel costs and other upkeep.

Second home mortgage requirements

Before you apply for a second home mortgage, it’s important to review the following:

• Credit score: Check your credit score to ensure it meets the lender’s requirements. A higher credit score could help you secure a better interest rate.
• Assets: Evaluate your assets, including your savings and investments, to ensure you have enough for the down payment and closing costs.
• Debt: Review your existing debts to understand your debt-to-income ratio, which loan providers use to gauge your ability to handle additional mortgage payments.
• Income: Confirm that your monthly income is stable and sufficient to cover both your current mortgage and the new one, along with other expenses.

When buying a second home, you’ll likely need additional cash reserves. Well-qualified individuals likely need at least two months of reserves, while less-qualified applicants may need at least six months of reserves.

Debt-to-income requirements

Debt-to-income (DTI) requirements for a second home mortgage may depend on your credit score and the size of your down payment. Generally, the more you put down and the higher your credit score, the more likely your lender will allow a higher DTI.

Some homeowners might choose to offset their expenses by renting out their vacation homes when they're not using them. Doing this could violate your mortgage terms because you are using the property as an investment instead of a true second home, resulting in higher risk to the lender.

How to qualify a property as a second home

According to RCB BankRCB Bank, to qualify as a vacation or second home, typically, the property must:

• Be lived in by the owner for some part of the year
• Belong to the buyer (it must be in your full control and not generating income)
• Not be rented, or run by a management firm

The differences between mortgages on primary residences and second homes

On your primary mortgage, you might be able to put as little as 5% down, depending on your credit score and other factors. According to The Mortgage ReportsThe-Mortgage-ReportsThe-Mortgage-Reports, on a second home, you will likely need to put down at least 10% to buy a vacation home. As with any loan, do your research, talk with multiple lenders and choose the loan that works best for you.

How to buy a second home

Below is a step-by-step guide to help give you an overview of the homebuying process when purchasing a second home:

• Define your goals: Determine the primary purpose of your second home (perhaps it’s for rental income, retirement destination, or a vacation retreat). Identify your ideal location and property type.
• Assess your finances: Review your current financial situation including your monthly income, savings and expenses. Consider the down payment for a second home, mortgage rates and additional costs like property taxes and maintenance.
• Get preapproved for a mortgage: Research mortgage rates for a second home as they can differ from rates for primary residences. Contact loan providers to understand your borrowing capacity and gather necessary documents for preapproval.
• Understand requirements: Learn about second home mortgage requirements, which may include a higher down payment and stricter credit standards compared to primary residence loans. Ensure you meet this criterion to qualify for financing.
• Select a real estate agent: Find a local real estate agent and home lending advisor with experience in the area. Discuss your needs and preferences with them.
• Start your property search: Use online listings, attend open houses and explore different neighborhoods. Create a list of your must-haves and deal-breakers. Tour properties in person to get a feel for the space and location.
• Make an offer: Work with your real estate agent to create a competitive offer based on market conditions and property value.
• Schedule a home inspection: Hire a professional home inspector to check the property for any hidden issues. Review the inspection report and negotiate repairs or adjustments with the seller if necessary.
• Finalize the purchase and close: Review and sign the closing documents. Arrange for the transfer of funds, including the down payment and closing costs. Attend the closing meeting to sign the final paperwork and officially transfer ownership. Obtain the keys and take possession of your new second home.
• Move in and settle: Plan and execute your move, whether it’s furnishing, decorating or preparing the home for guests or tenants. Set up utilities, address maintenance needs and enjoy your new property.

In summary

Buying a second home involves a clear understanding of your personal goals, financial assessment and navigating second home mortgage requirements. Start by defining your purpose for the property, reviewing your budget and getting preapproved for a mortgage. Be mindful of the down payment for a second home and find a real estate agent to help you through the search and purchase process. Visit homes, make a compelling offer and don’t skip out on the inspection.

Once everything is in place, finalize the deal and enjoy your new property. For a seamless experience, work with a home lending advisor who can guide you through financing options and help ensure you meet all necessary criteria.

Second home FAQs

1. Can a VA loan be used to finance a second home? (MSV 210)

No, VA does not permit you to finance a second home that will not be your primary residence. However, if you have remaining entitlement (the amount the VA guarantees) and meet the eligibility criteria, you could potentially use a VA loan to purchase another primary residence while renting out the first one.

2. Is mortgage interest on a second home deductible? (MSV 170)

According to the IRS, mortgage interest paid on a second residence used personally is deductible as long as the mortgage satisfies the same requirements for deductible interest as on a primary residence.

3. Can a second home be considered a primary residence? (MSV 140)

No, a second home cannot be considered a primary residence. A primary residence is where you live most of the time and consider your main home. If you have more than one home, you can only designate one as your primary residence for tax purposes and other legal considerations. The other home would be classified as a second home, vacation home or rental property.

4. Can you get FHA loan on a second home? (MSV 70)

No, you generally can’t get an FHA loan on a second home or an investment property. FHA loans are designed for primary residences, meaning the home must be where you live most of the time. However, there are specific situations, like relocating for work, where you might use an FHA loan for a new primary residence while keeping your old home as a rental property. This often requires meeting FHA guidelines and possible additional considerations.