Some steps in buying a second house are similar to buying your first. But there are critical differences in how you can finance the purchase and what you’ll pay monthly to maintain the home.
- Buying a second house requires more cash for a down payment and savings.
- You can’t use government loans, only conventional and jumbo loans.
- Your monthly mortgage and insurance premiums will be more expensive.
What you’ll need to buy a second home
How you’ll use your second home will limit your mortgage options. For personal use, a commuter home, or if you’re buying a second home that will be your primary residence, you must apply for a conventional loan.
Conventional lenders will issue loans for vacation homes and some investment properties. But you may have trouble qualifying for homes that need substantial work, like fixer-uppers.
Most government-backed loans don’t issue mortgages for vacation homes and investment properties. However, they’ll consider your application if you need a commuter home for work.
Can I use a government loan for a second home?
|Second property type||Conventional||Government*|
|Personal or family use||✅||❌|
Second home mortgage requirements
Mortgages for second homes have stricter requirements than those for primary residences.
To balance out the risks on second homes, lenders expect borrowers to have a larger down payment, higher credit scores, and more cash in the bank. The following requirements are standard for second home purchases:
|Debt-to-income ratio||43% or lower|
|Cash reserves||2–6 months of mortgage payments|
Some lenders will accept “compensating factors” if you don’t meet their criteria. For instance, if your credit score is below 640, you might still qualify with a larger down payment and more cash reserves.
How to pay for a second home
Second homes are typically more expensive than primary ones because both lenders and insurance providers see more risk, and charge higher rates and premiums.
Conventional mortgages are the most common financing option for second homes. You can buy any type of second home with a conventional mortgage: investment properties, vacation homes, rentals, and commuters.
For rentals, you can rent the home out for six months out of the year. If you rent for longer than six months, your lender will consider the home an investment property and may raise your interest rate. For homes that need significant work (such as a fix and flips), conventional mortgages are not a good option.
For homes above $726,200, you’ll need a jumbo loan. These loans are not insured by Freddie Mac or Fannie and are more risky to your lender. Jumbo loans come with higher interest rates as a result.
For jumbo loans, lenders will let you rent your home for 14 days out of the year. For longer periods, your lender will consider the property an investment.
A reverse mortgage allows homeowners 62 and older to borrow against the equity on their primary residence. This money can be used toward purchasing a second home.
A 401(k) allows you to borrow money from your 401(k). The advantage here is you get to pay yourself back, not a lender.
Hard money loans
These are short-term loans issued by private lenders, usually for investment properties that need significant work. The terms are short (usually 1 to 3 years) and the interest rates are high. But they’re issued within 1 to 2 days after your application is accepted and can help you fix-and-flip a property quickly.
Costs of owning a second home
Your biggest expense will be your mortgage. Mortgage lenders will likely add 50–100 basis points to whatever the ongoing rate is. For instance, if you normally qualify for a 5.25% mortgage rate, expect a 5.75–6.25% rate for a second home.
Second homes have other costs you should consider, such as:
- Speciality insurance policies and riders. Home insurance on second homes doesn’t always cover expensive items held within the home, such as paintings. You may need landlord insurance if you plan on using the home as a rental.
- Utilities. You must pay for electricity, gas, and water even when not there. Service providers don’t recommend turning utilities off, as it can lead to long-term damages that cost more than the monthly utility bills.
- Property maintenance (i.e., landscaping and upkeep.)
In addition, each type of property will have its own unique homeownership costs.
Home insurance premiums tend to be more expensive on vacation homes, often because of the location. For instance, if your home is on the beach or in the mountains, you could be at greater risk of flooding or wildfires.
Maintenance such as lawn care, system repairs, cleaning fees, and security are all costs to consider. A good rule of thumb is to set aside 1–2% of your home’s value for annual upkeep.
Travel expenses include traveling to and from your vacation home, such as airfare and car maintenance.
A property management company might help you rent out your property while you’re not using it.
Rehab costs could involve building materials, professional labor, appliances, and landscaping.
Carrying costs are ongoing expenses you’ll pay before selling or renting out the investment property. These could include HOA fees, utilities, property taxes, insurance, and mortgage interest.
Marketing and agent fees could cost roughly 1–3% of your home’s selling price. Many investors will hire an investment real estate agent to help them list and sell a property. Even if you don’t use an agent to sell, you’ll likely need to pay for marketing and advertising your investment.
Landlord insurance premiums will be roughly 25% more expensive than a regular home insurance policy.
Operating expenses — marketing fees, tenant screening, landscaping, pest control, repairs, property taxes, and property management — are all costs you’ll need to consider.
During vacancy periods, you’ll still need to pay for utilities and upkeep. Remember to factor in the costs of maintaining empty rooms since you likely won’t have 100% occupancy at all times.
Get professional help from a realtor
Buying a second home is complicated. It might have tax implications or involve local rental laws that could muddle your plans. A buyer’s agent can help you find a property that meets the stricter lending requirements.
For second homes that are also rentals or investment properties, try hiring an investment real estate agent. These agents are often investors themselves and will know the complications of buying and selling investment properties. They can also help you with financing by introducing you to lenders.
We recommend connecting with an experienced real estate agent. They can help you find a home in your desired market, help you negotiate the best price, and give you expert guidance during the closing process. They’re especially crucial when buying a second home in an area you don’t know, as they can use their local knowledge to help you pick the right location to buy.
Clever Real Estate partners with local real estate agents from full-service brokerages like Century 21, Keller Williams, and RE/MAX. Moreover, these agents offer Clever Cash Back for qualifying buyers, which could help you cover closing costs.