How to buy a second home
Learn about the different loan and financial requirements
There are lots of reasons you might want to buy a second home. You might want a vacation house. You might want the house for a rental or investment property. You might want to make the house your new primary residence while keeping the house you live in right now. There are other reasons, too.
Many of the things you were required to do to buy your primary residence you'll also need to do to buy a second home. However, there are also important differences you’ll want to understand before you get started. Read on to learn more!
Second home mortgage choices
One difference between purchasing your primary residence versus a second home is the type of mortgage for which you can apply. Most of the time, you will be limited to buying a second home with a Conventional loan. These are mortgages offered by private lenders without a guarantee from the federal government.
You can typically only buy a primary residence with a government-backed mortgage (VA, FHA, and USDA loans). This means you can’t buy a second home with these mortgages (in most cases).
Financial requirements for buying a second home
Lenders often have higher credit, income, and financial requirements for approving a mortgage application to buy a second home, compared to buying a primary residence. That’s because mortgage companies view lending money to buy a second home as a greater financial risk.
As a result, many lenders charge higher interest rates for second homes and require higher minimum down payments as well as higher minimum credit scores. They also have maximum debt-to-income ratio (DTI) requirements you will need to meet. DTI is a percentage you get by dividing your total monthly debt payments by your gross monthly income. Many lenders have a maximum DTI of 43% for Conventional loans.
If you are buying a second home while still making monthly mortgage payments on your primary residence, the cost of both mortgages will be included in your DTI. Look at this sample calculation:
|Monthly gross income
|Monthly payment, first home
|Other monthly debt payments
|Monthly payment, second home
|Total monthly debt payments
|Calculation: $4,000 ÷ $10,000 = 0.40, or 40%
In this example, the applicant has a DTI under the 43% maximum lenders might use. Knowing your DTI is important, because it affects whether you may qualify for a mortgage to buy a second home. It also can help you understand how much money a lender might be willing to loan you in order to buy that second home.
Benefits and costs of investment and rental properties
If you are buying a second home as an investment or rental property, it is a good idea to look at the potential income you might earn from these properties as well as the potential costs of owning, maintaining, and managing them. Consult a real estate professional to help you estimate the benefits and costs. Then, work with a financial professional who can help you understand how buying a second home fits into your overall finances.
Lenders often have different requirements for approving mortgages for second homes that are used as rental or investment properties. Learn more about mortgages for investment and rental properties.
Buying a second home as your primary residence
There is one circumstance where it may be possible to buy a second home with a government-backed mortgage, which is when you intend to occupy the property as your primary residence. However, keep in mind that in most cases, you will be limited to having one VA, FHA, or USDA loan at a time.
This means that if you bought your current home with a government-backed mortgage, and you are still paying off that loan, you are unlikely to qualify for a new, government-backed mortgage to buy a second home. Conventional loans do not have these restrictions. You can often qualify for more than one Conventional loan at a time.
Last reviewed and updated September 2023 by Freedom Mortgage.