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 needed to do to buy your first home you need to do to buy your second home as well. But 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 is the mortgages you can use when you are buying a second home. 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 by 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 your second home compared to buying your first. That’s because they view lending you money to buy a second home as a greater financial risk.
As result, many lenders charge higher interest rates for second homes and require higher minimum down payments and higher minimum credit scores. They will 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 first home, the cost of both mortgages will be included in your DTI. Look at this sample calculation:
|Monthly gross income||$10,000|
|Monthly payment first home||$1,500|
|Other monthly debt payments||$1,000|
|Monthly payment second home||$1,500|
|Total monthly debt payments||$4,000|
|Calculation: $4,000 ÷ $10,000 = 0.40 or 40%|
In this example, the second home buyer has a DTI under the 43% maximum lenders might use. Knowing your DTI is important because it affects whether you qualify for a mortgage to buy a second home and helps you understand how much money a lender might be willing to loan you to buy it.
Consider the 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 and the potential costs of owning, maintaining, and managing them. Think about working with a real estate professional who can help you estimate these benefits and costs and working 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 use your new home as your primary residence. However, keep in mind that in most cases you are limited to having one VA, FHA, or USDA loan at a time.
This means 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 house. Conventional loans do not have these restrictions. You can often qualify for more than one conventional loan at a time.
Buy a second home with help from Freedom Mortgage
We can help you buy a second home with competitive rates on conventional loans and exceptional service. Call 877-220-5533 to speak to a Freedom Mortgage Loan Advisor or visit our Get Started page.
Last reviewed and updated October 2022 by Freedom Mortgage Corporation.