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How to buy a second home

Yahoo Personal Finance· Getty Images
Updated 5 min read

Whether you dream of a snowbird lifestyle where you spend winter in warm sunshine and summer enjoying gentle breezes, want a lakeside vacation retreat, or hope to establish financial security with income from a rental property, you’ll need a budget and a plan to accomplish your goal of buying a second home.

If you already own your primary residence, you have some experience with the process of buying a home. But buying a second home typically requires more cash up front, a stronger credit profile, and an understanding of the tax implications of the purchase.

Let’s explore what it takes and what you need to know to buy a second home.

Read more: 13 steps to buying a house

A second home can be used for a variety of purposes besides vacations or as an investment. Some people spend time in two locations for work and prefer to own property in both places. Others are preparing for a future retirement in a new location and want to build equity in a home there. Some people buy a second home near a university where their children can live while in school.

While your goals for your second home are personal, how you intend to use the property has tax implications and will affect your mortgage options to finance the purchase.

Just like when you purchased your primary residence, you’ll need to consider all the costs of buying a second home. In addition to the mortgage principal and interest, you’ll need to budget for:

  • Homeowners insurance. Insurance rates vary by location and can be higher in some areas popular for vacation homes, such as coastal Florida or mountain regions in the West. In addition, rates may be higher or lower depending on whether you rent the property for short-term stays or long-term leases or whether the property is often empty.

  • Property taxes. Get an estimate before finalizing your offer.

  • Homeowners' association dues. Some communities charge homeowners fees for maintenance and amenities.

  • Maintenance. A common rule of thumb is to save at least 1% of the home’s value for maintenance and emergencies. If your second home is farther away or you have renters, you may need to budget for professional maintenance services.

  • Property manager. If you choose to rent a property, especially to short-term renters, you may want to hire a manager to handle the details. That typically runs 8% to 12% of your rental income.

  • Utilities. Your costs will depend on how often the property is occupied.

  • Vacancy. If you’re counting on rental income, make sure you have the resources to cover expenses when the property is empty between tenants.

  • Travel costs. If you buy a second home at a distance from your primary residence, consider how much it will cost in gas or airfare for visits.

Learn more: Housing types 101 — What is a duplex?

Your loan options vary according to whether your second home is for personal use or as an investment.

Typically, second-home buyers apply for a conventional loan or a jumbo loan to finance their purchase. Government-backed loans from the FHA and VA are usually not an option for second homes or investment properties.

Lenders usually classify a home as a second home rather than an investment property if it’s rented for a maximum of 14 days annually.

However, if you finance the purchase with a conventional loan, most lenders will allow you to rent the property to tenants for up to six months if you don’t use the estimated rental income to qualify for the loan.

If you need a jumbo loan, most lenders will limit you to renting the property for a maximum of 14 days to be considered a second home.

Both jumbo and conventional loans are available to finance an investment property, but they typically have stricter qualification guidelines than second home loans. However, you may be able to use some of the estimated rental income to qualify for the loan.

If you rent your property full-time to others and don’t use it yourself, that’s considered an investment property by the IRS. In addition, the IRS rules say that your second home can be considered a residence if you use it the greater of either 14 days per year or “10% of the total days you rent it to others.”

The IRS explains it this way: If you use the second home one month per year, it’s considered a residence rather than an investment property, unless you rent it for 300 or more days per year.

Consult a tax professional to estimate deductions for your second home or rental property.

Generally, lender requirements to qualify to buy a second home are stricter than to finance a primary residence. Rates, terms and guidelines vary by lender and according to your individual circumstances, so you should shop around to compare them.

Typical requirements are:

  • Credit score: A minimum of 620 to 680 or above for a second home loan; 700 or above for an investment loan.

  • Down payment: A minimum of 5% to 10% for a second home loan; 15% to 25% for an investment loan.

  • Debt-to-income ratio: 43% to 45% for both loan types.

If you’d rather not apply for a mortgage to buy a second home, there are other options to consider:

  • Cash: If you have significant savings or investments to sell, you may want to pay cash for your second home.

  • Cash-out refinancing: Depending on how much equity you have in your primary home, you may be able to refinance that loan and use your equity to buy a second home.

  • Home equity loan. If you have plenty of equity in your primary residence, you could borrow against it to purchase a second home. However, the interest rates on a home equity loan may be higher.

  • Home equity line of credit: Alternatively, you could open a home equity line of credit (HELOC) to pay for a second home. Typically, a HELOC has a higher interest rate, but as you pay down the balance you gain access again to your equity.

Dig deeper: HELOC vs. home equity loan