How To Buy A Second Home

Whether a vacation home, a place to do business, or rental property, getting a second home is an exciting endeavor. That being said, tacking on another piece of real estate on top of your primary residence comes with added responsibilities. If you're thinking of buying a second home, there are special considerations to mull over.

Here, we'll walk you through the steps on figuring out whether buying a how to buy a second home.

What Is A Second Home?

A second home is a residential property you live in for at least 14 days out of each calendar year. Your primary residence, on the other hand, is where you live most of the year.

While the process to buy a second home is similar to purchasing a primary home, lending requirements are different for a second home versus a primary one. For starters, you usually will need at least a 10% down payment for a second home. Interest rates might also be higher.

How To Buy A Second Home In 5 Steps

The steps involved in buying a second home are similar to those of buying a primary residence, with a few key differences.

1. Get Preapproved

When you get preapproved for a mortgage, the lender gives you documentation that lets you know the amount you can afford for a home based on a hard credit check and other financial information. A preapproval letter isn't a 100% guarantee that you've secured a mortgage, but is a vote of confidence from a lender who has reviewed your financial profile. It also tells sellers you have the funds in tow to buy a home. Plus, knowing the ballpark amount for the mortgage you'd likely get approved can help you budget.

To get mortgage preapproval, you'll need to submit personal and financial information, and the lender will do a hard pull on your credit. Depending on your lender, you can be preapproved online or by going to a physical location and meeting with a loan officer.

2. Connect With A Real Estate Agent

While you can bypass working with a real estate professional these days, finding the right real estate agent can help you figure out your needs and preferences, and can connect you to relevant inventory on the real estate market. Plus, tapping into their expertise can save you time and money, and can make for a less stressful experience.

Consider working with a real estate agent who is knowledgeable about the market where you're interested in purchasing your second home.

3. Tour Homes In Person When Possible

Photos, a 360-degree video tour and a listing can only tell you so much about a home. Scheduling an in-person visit and doing a proper walk-through of a property can help you get a true feel for the home and notice the finer details of a space.

4. Make An Offer

When you make an offer on a house, you are promising to offer money to purchase a home. This is an opportunity to stand out from other interested buyers and make an impression on the seller that you’re serious about the house.

When you make an offer on a second home, you'll need to pay particularly close attention to the total costs of your property, and make sure you can afford everything with your additional property. Besides making sure you can afford the home, think about what earnest money you can offer, what contingencies you are willing to drop, and which ones you won't budge on.

5. Close On Your Second Home

Once the seller accepts your offer, you might be filled with a flurry of excitement. However, it's important to stay focused and get through the final step in the home buying process. The closing process typically takes anywhere from 30 to 40 days, sometimes longer.

You'll want to work with a real estate attorney or closing attorney to handle the paperwork. Before the lender releases funding, you'll need proof that you have homeowners insurance to cover the additional property. Plus, you'll want to work with a title company to check for any outstanding liens on the property.

When closing on your second home, other steps include scheduling a home inspection and waiting for appraisal results. Last, you will arrange for a final walk-through.

Reasons People Buy Second Homes

Let's take a look at some of the common reasons to purchase a second home:

Investment Property

When you buy a second home for an investment property, you'll may aim to generate profit either by renting it out, reselling it or flipping it. While your return on investment depends on the location and type and size of property, according to the S&P 500 Index, the average yearly ROI in the U.S. for residential real estate is 10.6%.

While you can generate income with an investment property, you'll need consider the added financial responsibility of multiple mortgages and home-related expenses. If you plan on renting out your investment property, you'll need to fold in the extra tenant costs, such as money to advertise and list a rental, hiring a property manager, and to stomach the costs when the property is vacant.

Secondary Residence Or Vacation Property

Another home could also be used as a vacation property or a secondary residence you live in for part of the year. This could be a smart decision, especially if you travel frequently to the same place for work or your business, or a vacation spot you return to on a regular basis.

Considerations For Buying Another Home

While buying a second home could generate income or be enjoyed as a vacation spot, it's not for everyone. In some cases, the costs can outweigh the benefits. You'll want to factor in your lifestyle preferences, finances and needs to determine whether it's the right choice for you.

Costs Of A Second Home

Buying "too much house," or one that exceeds your budget, can have you financially strained. Besides the mortgage for a second home, there's a slew of expenses that go into the total investment in a home.

Before you jump into second home ownership, you want to make sure buying another property fits within your budget. In some cases, it might be wisest to wait to buy a house. For instance, maybe you have other major financial expenses on the horizon — such as buying a car, sending your kid to college, or starting a small business.

It's also important to consider the state of the housing market. If it's a seller's market with a low inventory and high interest rates, your house hunt could be more stressful—not to mention more expensive. Just like with a primary home, it’s beneficial to be in a sound place financially—ideally with a good credit score, low DTI ratio, job security, and robust savings.

Some of the associated costs of buying a home include:

• Ongoing maintenance
• Homeowners and title insurance
• Property taxes
• Additional insurance coverage
• Down payment
• Interest rates
• Utility bills
• Repairs and renovations
• Tenant-related costs (if a rental property) 

Location Of The Property

Certain areas of the country will be more expensive to buy, whereas others are cheaper. Plus, you can expect different insurance costs and requirements. If you're living in an area prone to flooding, your mortgage lender may require you to purchase flood insurance.

If you're looking for a second home as a vacation property, you'll want to factor in safety, proximity to things that are important to you, such as being close to nature, art museums and culture, and lifestyle preferences.

How You’ll Finance A Second Home

Lenders might have stricter credit score, debt-to-income ratio (DTI) and cash reserve requirements for a second home. While credit score requirements depend on the lender, it's a good idea to have a minimum credit score of 720 for a second home, and a DTI of less than 43%.

Your DTI is calculated by dividing your gross monthly income by the total amount of debt you owe, expressed as a percentage. For instance, let's say your gross monthly income is $6,000, and you currently owe $1,500 a month. In that case, your DTI is 25%.

Whether you're planning to use your second home as an investment property or vacation property, the most common types of mortgages to make your purchase are jumbo loans and conventional loans. Note you'll need at least a 20% down payment on a jumbo loan, and 10% down payment.

Second homes aren't eligible for VA, USDA and FHA loans. What that means is that you'll need to put down a higher down payment. Our friends at Rocket Mortgage^® have a down payment requirement of at least 10%. But it really depends on the lender, as each lender has different requirements and policies.

Keep in mind, too, that second homes tend to have higher interest rates. Because it's a second home, it's considered a greater risk. In turn, you might be paying more in interest for your home.

On the tax front, according to the IRS, if you have a second home that you don't rent out or resell, you don't need to live in it or use it for a specific duration each year.

If you rent out your property for part of the year, for it to qualify as a second home, you'll need to meet one of two qualifications: either live in it for more than 14 days a year, or more than 10% of the number of days in a given year the home is rented at a fair rental price – whichever is longer.  

How You’ll Use The Property

Having a clear plan on how you'll use the property as well as how often you'll use it can help you gauge whether taking on the added costs is worth it or not.

If you're using the property in rare instances — once every few years or as a backup place in case your primary home is inhabitable — then it might not be worth the investment. However, if you plan on staying in your property more frequently, such as for entire seasons or even for several months out of the year, then, it could be a good idea.

Down Payments For Second Homes

Depending on the type of loan, down payments can work differently for second homes than primary residences. In some cases, you may not need a down payment or will need only a small one. Let's take a closer look:

FAQs On Buying A Second Home

Let's look at the most frequently asked questions on purchasing another home:

Is a second home the same as an investment property?

A second home is an additional residence that you live in for part of the year — perhaps as a vacation home or a place to live in during certain times of the year. An investment property is a home you purchase for the sole purpose of generating income. A second home can also be a rental property and rake in income for part of the year.

Can I buy a second home without selling the first?

Yes, you can buy another home without selling your first. However, you'll want to look at what types of mortgages can be used for a second home purchase. Plus, being aware of all the costs involved as you juggle two mortgage payments is another major consideration.

Can I buy a second home while paying a mortgage?

Yes, you can purchase a second home while still owing money on an initial mortgage. As a current homeowner, a few ways you can take out another mortgage is through a cash-out refinance, HELOC, or home equity loan.

Can I buy a second home without a mortgage?

You can buy a second home without a mortgage by paying for it entirely in cash. You won't have to worry about paying interest fees, getting title insurance or monthly payments.

Do I need a down payment on a second home?

Usually, you'll need a higher down payment on a second home — typically at least 10%. However, there are instances when you don't need a down payment on a second home. For instance, you can finance a second home on a government-backed mortgage. You can skip the down payment only if you turn it into a primary residence within 60 days after buying the home.

The Bottom Line: Second Home Ownership Could Be Right For You

A second home is a property that you live in at least 14 days of each year to be exact. This might be a vacation home, a place you do business, or perhaps a home that you rent out for part of the year.

If you're considering shopping around to purchase a second home, you'll want to consider what you'll use the second home for, your current finances, and also whether the investment of time and money is worth the benefits. 

If being a second homeowner piques your interest, you can apply for initial approval today. Getting preapproved can show you how much of a mortgage you'd potentially qualify for.