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Buyers and investors both know the value that can come with a second home.
Whether you are looking for a personalized vacation spot or interested in extra income—a second home has the potential to enrich your family for decades to come.
But what do lenders look for when someone wants a second home? What sort of benefits are there to owning a second home? And what are the requirements to get a second mortgage? You may think “can I afford a second mortgage?”
A second home may be a burdensome responsibility for some and a great benefit—financially and personally—to others. Which one you are will depend on your finances and your expectations about owning a second home.
Let’s start with the benefits of a second home, then look at the requirements for obtaining a second mortgage.
Benefits of a second home
The two most common reasons for a second property are:
- A second home you intend to live in for a portion of each year or stay at regularly.
- An investment property is usually purchased to rent to tenants and generate rental income for you.
Depending on the reason you want the second property, there can be differences in qualifying requirements and costs. Understanding these differences is better done before you start applying for a mortgage.
What do lenders consider a second home? If someone purchases a new property beyond their current home and plans to live there for at least part of the year, that is generally considered a second home.
Some lenders may require proof that the proposed property is 50 miles or less from the borrower’s current address for them to consider it as a second home.
Some examples of second homes include:
- Vacation homes
- Residences used for work
Some lenders will also want to know if it is a one-unit property or subject to any timeshare requirements.
For its part, the IRS has its own definition of a second home: property you live in for more than 14 days annually, or 10% of the total days you rent it to others.
Investment properties are residences purchased with the intent to earn income.
This income can be generated continually via rental income or as a single return payment through renovations and resell (also called fix and flip).
Unlike second homes, investment properties can have more than one unit. Multiple-unit properties allow landlords to earn more rental income through multiple tenants. Commercial properties can also be considered investment properties.
Either way, investment properties can create excellent long-term wealth strategies.
Furthermore—even if you buy a second property without any intention to rent it out to tenants, you’re still investing in your financial portfolio by paying off your mortgage.
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What are the requirements for a second mortgage?
When buying a second home, much of the process is the same as when you bought your primary residence. However, a second property’s financial requirements are higher than a primary residence’s. Check out the following list and do your calculations carefully.
Pre-approval should be near the top of your list. When you begin looking at a second home, it’s a good idea to know the amount you will qualify for and how much you can afford.
Ensure you can provide documentation of your assets, income, and debts. It would be best if you had sufficient income to cover monthly mortgage payments and any other debts, including any payments on your primary residence.
Also, consider budgeting income to cover extra maintenance expenses on your second property.
The general minimum credit score for a primary residence is 620. But for second properties, a lender may require a higher score.
In any case, higher scores are better since they help you qualify for the more competitive interest rates.
Conventional loan lenders typically require a minimum 10% down payment for a second property. This extra cash up front is because lenders see second properties as a greater risk.
The reasoning behind this extra percentage is that if a borrower gets into financial difficulty, they will work to keep the primary residence and foreclose on the second.
Financing solutions for second mortgages
This larger down payment requirement can be a bit of an obstacle for some. That’s why many borrowers use cash-out refinancing to secure the equity in their primary residence to better effect.
If the price of your home has risen since you purchased it, as it does with most homes, then a cash-out refinance can enable you to use that extra value for the down payment.
Ideally, it would be better to be able to put down 20%. That way, you can avoid PMI.
Private mortgage insurance (PMI)
PMI is always included as part of your mortgage costs if you put down less than 20%. These premiums are why it’s better to have a fifth of the home price available, as it will save you money in the long run.
If you have to purchase PMI, the added premiums will fall off automatically after you have paid 22% equity into the home. You also have the option of refinancing your second property once you have reached 20% equity.
If your income should, for whatever reason, suddenly drop—cash reserves can cover your mortgage payments for a while until your income level rises again.
Cash reserves can go a long way to getting a second mortgage approved. The reserves do not have to be readily available (sometimes called liquid), sitting in your bank account.
For example, funds in a 401K or in another retirement plan can count towards your cash reserves.
The bottom line—assess your financial situation
There are more rules to qualify for a second mortgage, depending on your financial situation and your plans for the second property.
Some try to use a second home mortgage qualification calculator, but it becomes complicated depending on the property’s intended use.
For example, if you’re buying a second home that will be your primary residence at some point.
Plans like this can complicate the home buying process, making the second home mortgage requirements difficult to assess.
If you have an interest in buying a second property—get started by contacting the mortgage experts at Homefinity.
We’ve got the combined experience of decades behind our loan officers. Together, we can find the homebuying solution you need.
Fairway Independent Mortgage Corporation dba Homefinity. NMLS#2289. 4750 S. Biltmore Lane, Madison, WI 53718, 1-866-912-4800. Restrictions and limitations may apply. All rights reserved. Equal Housing Opportunity.
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