Your Guide to Second-Home Mortgages

    A lot of us dream about buying a breezy cottage on the beach or a cozy cabin in the mountains, but what does it take to turn that dream into a reality? Whether you’re considering a vacation retreat or an investment property, buying a second home can be a smart choice for those who qualify. Let’s take a look at how qualifying for a second-home mortgage might look a little different from your first homebuying journey.

    Qualifications

    Applying for a second-home mortgage is nearly identical to the process you went through to get your primary home. The major difference is in the qualification standards. Generally, second-home mortgage requirements can be less flexible than they are for primary residences. If you’re in the position to buy a second home, these requirements may still be easy to meet, especially with the expert guidance of your Mortgage Advisor at the ready. Let’s take a closer look at what you should expect.

    Debt-to-Income Ratio & Credit Score

    Most lenders have a 45% maximum allowable debt-to-income (DTI) ratio for second-home mortgages. With this in mind, buying a second property typically makes the most sense after you’ve paid-down your first home and aren’t carrying any other large loan debts. If you’re worried that your DTI lands a little above 45%, making a larger down payment—or having a higher credit score—may offset that and help you qualify.

    Credit score requirements are also higher when you apply for a second-home mortgage. Lenders like to see a minimum credit score around 680, which is about 40 points higher than what’s typically needed for a conventional loan on a primary residence.

    Down Payment

    When financing a primary residence, there are many loan products available that allow you to pay a very small down payment. Some even allow for 0% down. This isn’t the case for second homes. Lenders often require at least 10% down on a second-home purchase.  The good news is that a larger down payment often ensures that your interest rates stay lower, making your second-home purchase more affordable in the long run.

    Vacation Homes vs. Investment Properties

    When purchasing a second property, it’s important to make a distinction between vacation homes and investment properties. Lending requirements are often more flexible for vacation homes, while the qualification standards for investment properties tend to be stricter. Let’s break down these key differences between requirements for investment properties and vacation homes.

    Vacation Homes

    A vacation home is meant for your own personal use and enjoyment. This can be anything from a private getaway in your favorite vacation locale to a second home closer to family or a condo in a city that you often travel to for work. Loan requirements for vacation homes include:

    • 10% minimum down payment
    • 1-unit properties only
    • You may or may not be able to rent out this property—make sure to mention this to your Mortgage Advisor if you plan to generate income by renting your vacation property

    Investment Property

    Investment properties allow you to generate income from renting out the home. You can live or vacation in an investment property, but if you’re renting it to others, your mortgage qualifications are going to differ. Compared to vacation homes, mortgages for investment properties include these characteristics:

    • 15-25% minimum down payment
    • Multi-unit properties allowed (1-4 units)
    • Rentals allowed—you can plan to have regular tenants or list it on Airbnb/other short-term rental sites depending upon local community guidelines.

    Benefits of Purchasing a Second Property

    Buying a second property can be a great way to improve your quality of life, either by providing a passive source of income or providing your family with a place to relax and make memories together. When you buy a vacation home, you get a retreat from everyday life, allowing you to be closer to the places and activities you enjoy most. Investment properties help you build wealth, creating financial stability for the years ahead. Keep these possibilities in mind as you explore whether buying a second property is right for you.

    Are you dreaming about that perfect vacation home or want to find a way to build long-term wealth? Give me a call today! 503-905-4938