A comprehensive guide to a second home loan
What You’ll Learn
Second homes, or vacation homes, must meet specific guidelines to be eligible for a second home loan.
Second home mortgage qualifications are typically more strict than for a primary residence.
Beyond a mortgage, several alternative financing options can help you pay for your second home.
If there’s a special place in your heart you frequently visit, then you may be ready to ditch hotel rooms and rentals and buy a more permanent place of your own. Second homes can serve a variety of purposes, from vacation spots to practical dwellings in prime locations.
Here’s how second homes differ from other property types, how second mortgages work, and what you can expect from the buying process once you’re ready to get started.
What is a second home loan?
A second home loan is a mortgage used to finance a secondary or vacation residence.
Second home loans differ from those used for primary residences and investment properties because each property type represents a different level of risk for lenders. For instance, because you’re not dependent on your second home as a primary place to live, lenders assume you may be more likely to stop making mortgage payments if you fall on hard times.
For a property to be considered a second home and deemed eligible for a second home loan, it must meet the following guidelines:
- The home must be a single-unit dwelling.
- The property must be suitable for year-round occupancy, even if you only intend to use it for part of the year.
- You’re required to have exclusive use of the property, meaning no long-term leases or timeshare scenarios.
- The home may not be under the control of a property management company.
- In most cases, it must be located a certain distance from your primary residence.
You may be able to rent out a second home when you’re not using the property, but rentals are typically restricted to 180 days per year. And any projected rental income cannot be considered for mortgage qualifying purposes.
Unlike second property mortgages, investment property mortgages’ allow for even longer rental terms (year-round), but also come with the toughest qualifying guidelines because they tend to have higher delinquency rates than other occupancy types. Lenders will typically expect that you are truly using the property as a second home and not a full investment property that allows for tenancies longer than 180 days.
Things to consider when financing a second home
While purchasing a second home is an exciting adventure, financing requirements can be a bit more strict than those for a primary mortgage. Second mortgages also tend to come with higher interest rates because of the increased risk they represent to lenders.
Second home loan mortgage requirements
Here’s what you’ll typically need to qualify for a second home loan:
- At least 20% of the purchase price as a down payment
- A lower debt-to-income ratio, usually less than 43%
- A good-to-excellent credit score
- Proof of enough cash reserves to cover several months’ worth of mortgage payments
Alternative ways to finance a second home
If you think it will be a challenge to get a second mortgage based on the requirements above, or you’d prefer a different way to pay, there are other alternatives to consider. These options will allow you to leverage the equity you’ve built up in your primary residence, and use it toward your second home.
Home equity line of credit (HELOC)
A home equity line of credit allows you to borrow against the equity from your primary home on an as-needed basis and pay it off with interest over time. It works similarly to a credit card where you can borrow up to a specified credit limit, and the amount gets replenished as you make payments.
Keep in mind that because HELOCs are secured by your primary residence, your lender may be able to foreclose on your home if you stop making payments.
A cash-out refinance is similar to a traditional refinance in that you replace your current primary mortgage with a brand new one. However, with a cash-out refi, you tap into your current home’s equity to free up extra cash for your new second home.
Of course, this will add to your existing mortgage balance by increasing the amount you owe, which may result in a higher mortgage payment. Also, when you refinance, you typically reset the payoff clock on your mortgage, especially if you’re getting a new 30-year home loan, so going this route for a second home may take you longer to pay off your first mortgage.
How to buy a second home: The process
If you decide to move forward with a second home loan, then here are the steps you can expect from the homebuying and mortgage process.
Before you start shopping around and going to open houses, you’ll want to confirm how much you can afford with Better Mortgage to spend. A pre-approval can give you an idea of the amount you’ll be approved to borrow.
Not all lenders offer second home financing. But luckily, Better Mortgage does! With our online process, you can get pre-approved in as little as 3 minutes, without affecting your credit score.
Work with a local agent
Once you’ve been pre-approved, you’re ready to connect with a Better Real Estate Agent. Because you’ll likely be buying a second home in a different area from where you currently live, it’s a good idea to interview a few local agents. They should be able to answer your questions about various neighborhoods, traffic patterns, and local events and help guide you through your search.
Hunt for your new home
After connecting with a Better Real Estate Agent, it’s time for the fun part: shopping for homes. Think about taking a trip to the area where you want to buy and asking your agent to set up multiple showings to make the best use of your time.
Make an offer
Once you’ve found the perfect second home, it’s time to make an offer. You’ll work with your agent to decide how much to offer, draw up the paperwork, and negotiate with the seller. If your offer is accepted, you’ll be ready to move on to the last step in the process.
Close on your mortgage
Most homes close within 1-2 months of when the seller first accepted the offer. During this time, you’ll have any requested inspections, receive an appraisal report, complete your mortgage documentation, and attend a final walk-through.
Then, you’ll be ready to head to closing where you and the seller will sign paperwork and your lender will send over the necessary funds. At the end, you’ll be handed the keys and officially be the proud owner of a second home and you can close 10 days faster than the industry average with Better Mortgage.
Get a second home loan with Better Mortgage
Buying a second home is an exciting opportunity. But before you dive in, it helps to know exactly how much second home you can afford.
Our pre-approval process takes as little as 3 minutes and can give you the confidence to make an offer on your second home.