How do I buy a second home?

If you want to get a second home, expect the financing to be different from your primary residence. Buying a second home may require you to provide more down payment, possess a higher credit score and declare whether you’ll be using it for vacation or an investment. Depending on what you’re using the second home for, this unfamiliar process may very well be worth it. Keep reading to learn what to expect so you can understand your options.

Be prepared: if you’re trying to buy a second home, know that you may be running into higher mortgage rates and stricter qualifications. This is because, should the worst happen, you’ll naturally prioritize paying the mortgage on your primary home.

There are a couple of ways you can finance a second home if you’re financially ready.

Conforming loans

These loans are versatile and allow you to finance both a second vacation home and an investment property. You’ll probably use a Conventional loan for this purpose since they are the most widely available and accessible.

While most Conventional loans require a minimum score of 620, that could be higher for a second home. In fact, if you happen to be purchasing multiple investment properties, you may need a minimum credit score of 720.

More than likely, you’ll need to prepare a minimum 10% down payment with a Conforming loan, though this depends on how much you’ll be borrowing compared to the home price. You also won’t have access to low or zero down payment options that are available for primary homes.

Jumbo

A Jumbo loan is considered a non-agency program, since they exceed lending limits set by the Federal Housing Financing Agency (FHFA). Because of this, there’s a bit more freedom in how much you can borrow if you’re a borrower with a high credit score and strong finances. At Guild, borrowers can get Jumbo loans up to $3.5 million with high enough credit.

When it comes to financing, it makes a difference if you’re going to use the second home for personal vacations, as an investment property, or for a business.

Pros and cons of buying a second home

Second homes are usually single-unit properties, such as a single-family home, townhome, or condo that you own for at least part of the year. You must own the property for it to be considered a second home, so rentals and timeshares are off the table. Be aware that a second home is more likely to be treated as an investment property if it’s in the same city as your primary residence.

Benefits:

• Favorable financing options: It’s easier to get financing for a second home than for an investment property. While a good credit score is always recommended, the minimum requirement is much higher for investment properties.
• Easy vacations: If you love to frequent the beach during the summer or head to the mountains skiing in the winter, a second home may be a good purchase if you’re constantly visiting every year. No need to look for rentals or hotels, plus you can share the experience with family and friends!
• College housing: If your child is living off-campus, a house and apartment that you’ve vetted can be a beneficial and stable environment for them to live out their college years.

Drawbacks:

• Property taxes and insurance: Expect to spend more on property taxes every year and purchase additional insurance, including coverage for disasters if your second home is in a wildfire or hurricane-prone area.
• Security costs: You may need to invest in a security system if your home is unoccupied for long periods of time.
• Maintenance and repairs: It’s important to keep up with home maintenance and make repairs as needed, which could be frequent in coastal or mountainous areas with more extreme weather.

Pros and cons of buying an investment property

Investment properties are one to four-unit properties, like duplexes, that you don’t occupy. Rentals and businesses are a common use. These have specific criteria and different financing requirements.

Because you may have multiple renters, keep in mind you may have to set aside more of your budget for maintenance and repair costs.

Benefits:

• Rental income: You can recoup your investment and make a profit by simply renting out your property. This can be very lucrative if your home is in a desired locale.
• Investing: Unique among other investments, housing generally appreciates in value. A second home is an asset to diversify your portfolio and reduce risk.

Drawbacks:

• Higher financing qualifications: A higher credit score and greater down payment may be required. You may also be limited to how many investment properties you can own under your name without a formal business.
• Taxes and insurance: Just like second homes, you will need to spend more on taxes every year if the home is making you income. In addition to weather-specific insurance, you may also need to pay for landlord insurance.
• Security: Not only will you want to protect your assets, but you’ll also want to provide a safe place for your tenants to live, so the security requirements for investment properties may be higher than a second home.
• Maintenance: As the owner, you’re generally in charge of covering repairs and annual maintenance for your renters, which can be less predictable than in homes only you occupy.

While the process may differ depending on which mortgage type you qualify for, here are the general steps for buying a second home.

1. Estimate your monthly payments: Most second home mortgages require you to provide at least 10% down payment. If this home could be an investment property, you may need to put down even more. Play around with numbers using our mortgage payment calculator to help you get a ballpark number.
2. Lower your debt-to-income (DTI) ratio: You’ll want to make sure you have your debts in order if you want to get approved for financing a second home. Like any mortgage loan, you want to aim for a figure under 45%. Note that your current mortgage will also play a part. You can predict your DTI with our pre-qualifcation calculator.
3. Amp up your credit score: Depending on how much you’re borrowing, you may need to get your credit score in tip-top shape. As mentioned above, investment properties require higher credit scores. Programs that are catered to people with lower credit scores are usually only available for primary homes.
4. Gather documents for pre-approval: Like all types of mortgages, you’ll need to get pre-approved by a lender for a certain amount before you can put down an offer on a second home. Lenders require the same documentation of bank statements, tax returns and proof of employment for second homes as they do for the first.

The rest of the steps are typical for all mortgages. You’ll get pre-approved, make an offer and close on your new home.

While secondary home financing has specific qualifications, some protocols should still be familiar to you. As long as you’re financially prepared and ready, a second residence could serve as a wonderful vacation opportunity or investment. Our loan officers are well-equipped to help you with this important purchase; find one in your area today!