Buying A Second Home: A Guide

10 Min Read
Updated July 31, 2024
FACT-CHECKED
Written By
Hanna Kielar
Reviewed By
Gillian Glover
White beach house in tall grass.

Buying a second home can be an appealing prospect for homeowners who can comfortably afford the mortgage on their primary home and want a vacation home, a place for their children to live in while going to college, or a way to diversify their assets.

Let’s look at what’s involved in buying a second home, how the process works, and what you need to know about owning one.

Key Takeaways:

  • A second home is another property you live in for at least part of the year instead of renting it out full time.
  • You can use a second home for vacation, retirement, rental income or diversification of your assets.
  • Lenders consider second homes risky if you’re still paying off the mortgage on your primary residence, so you’ll need to make a larger down payment on a second home.

What Is A Second Home?

A second home is a property you buy and live in for part of the year in addition to your primary residence. It’s different from an investment property because you occupy it for at least part of the time instead of primarily renting it out to tenants. Second homes have requirements for how much of the year the home must be occupied versus rented out.

What’s Your Goal?

Why Buy A Second Home?

Buying a second home might get you closer to people you love and places you enjoy, or it may help you accomplish your financial goals. With online apps making it easy to set up short-term rentals, many second homes serve as both a family getaway spot and a source of income.

Here are some of the most common reasons for buying a second home:

  • To use as a vacation home. If you and your family love the mountains but must live in the city for work, you might be able to spend more time getting away if you own a vacation house in a place you love. The same goes for if you have people or other places you want to establish a home close to.
  • A way to diversify your assets. Homes tend to appreciate, so you can use your second home to diversify your investments. Retirement plans typically invest solely in stocks, so investing some retirement savings in real estate means that a portion of your investments won’t be subject to the whims of the market. Like all assets, real estate has cyclical booms and busts but generally holds its value over time.
  • A source of rental income. Though a second home is your residence, you can rent it out in the short term for rental income.
  • A place to retire. If you plan to move after you retire, you can get a head start on creating a community in a place you love by purchasing a second home. The home can be a retreat for now and a place to retire to later.
  • Potential tax breaks. You can deduct your property taxes and mortgage interest on your vacation home when you do your taxes. If you want to use the home as a second home and a rental property, the IRS allows you to take prorated tax deductions on property owned partially for investment purposes, which should offset your costs. And if you rent out your second home for 14 days a year or less, you don’t need to report that income to the IRS.
  • House a family member. You might also want to buy a house for a family member to keep your parents or an adult child nearby.

Get matched with a lender that can help you reach your financial goals.

Can You Afford A Second Home?

While there are benefits to buying a second home, you need to be sure you can afford it. To determine whether you can swing it, consider the following expenses that come with a second home:

  • Another debt obligation. The biggest hurdle to getting a second home is typically being able to afford the payment. If your primary residence isn’t paid off, you’ll be making two mortgage payments each month.
  • Down payment. To buy a second home, you’ll need at least a 10% down payment on a conventional loan and at least 20% on a jumbo loan.
  • Utilities. Homeowners should set aside about $400 per month to pay for utilities.
  • Insurance costs. The cost of homeowners insurance will vary depending on the home and location. The average policy costs $900 to $1,800 per year.
  • Maintenance responsibilities. You’ll be responsible for all the routine maintenance and surprise repairs for your second home, including roof repairs, landscaping, and care of the electrical, plumbing, and heating, ventilation, and air conditioning systems. Homeowners should set aside 1% to 4% of the home’s purchase price to cover maintenance costs each year.
  • Property taxes. Local and state governments collect property taxes to fund community services like infrastructure, schools and public safety. The amount you pay will depend on the value of the home and the tax rate where the house is located.

Find a refinance lender that will work with your unique financial situation.

Mortgage Requirements For A Second Home

In general, lenders consider a mortgage for a second home riskier than a primary residence mortgage. That’s because you’re more likely to default on your second home’s mortgage than the loan for your primary residence if your budget gets tight.

For this reason, you’ll need a larger minimum down payment – 10% for a conventional loan, as opposed to just 3% for a primary home loan. You will also need a credit score of at least 620 (ideally 700 or above) and should aim for a debt-to-income ratio no higher than 36%.

In addition to stricter eligibility requirements, you’ll also have fewer loan options. Conventional and jumbo loans are the two most common types of loans for buying a second home. With few exceptions, loans backed by the Federal Housing Administration, Department of Veterans Affairs and Department of Agriculture – known as FHA, VA and USDA loans – can only be used to purchase primary residences.

How To Buy A Second Home

The process of buying a second home can be similar to the first time you bought one – but there are also some key differences. Here are the steps to take to buy a second home.

1. Determine Your Goals For A Second Home

The first step is to figure out what you will use the second home for, as this will determine where you buy the home. If you plan to use it as a vacation home, you’ll want it to be far enough from your primary residence that it feels like you’re getting away from everyday life – but not so far away that you rarely get to travel there. If you plan on hosting family members often, you may also want to consider looking for a nearby property.

Some other factors related to location that potential second-time home buyers should think about are the attractions in the area that drew you there in the first place, the quality of the surrounding neighborhood – especially if you’re renting the property out to tenants – and what the climate is like throughout the year.

For example, you might think moving to Florida sounds great, but you could end up in a town farther from the beach than you expected or realize you don’t enjoy the heat and humidity. Do your research to find the best place to buy a vacation home before purchasing a property.

2. Decide How To Finance The Home

It’s essential to budget for two mortgage payments, unless you own your primary home free and clear. You don’t want to put yourself in the situation of juggling two mortgages if you can’t afford both.

In addition to a higher down payment, buyers will likely encounter a higher mortgage interest rate and more expensive homeowners insurance when buying a second property.

Some of the additional expenses that can accompany the buying process for a second home are closing costs and property taxes. It’s important to discuss the closing costs with your Realtor to ensure no surprises at the time of closing.

3. Compare Mortgage Lenders And Get Preapproved

Your next mission is to get financing. You can start by getting preapproved for a mortgage. Preapproval is a letter from a lender stating how much it’s willing to loan you. While it’s not a guaranteed loan offer, it gives you an idea of how much house you can afford. Preapproval also shows sellers you should be able to get financing.

There are different factors that lenders consider when evaluating someone for a loan on a second home. For example, they’re stricter on a person’s debt-to-income ratio and credit score.

4. Get A Real Estate Agent

A reputable real estate agent in the market you’re shopping in can help you make a well-informed purchase. They’ll be able to help you find the right home, even if you can’t be there in person.

Working with an agent familiar with the local area is a good idea, especially if you’re looking for a vacation property close to town, nearby beaches or other attractions.

5. Look For A Second Home And Make An Offer

Now it’s time to start touring homes and attending open houses. Your real estate agent can help you find listings that match your criteria and priorities. Once you’ve found a home you wish to buy, your agent can help you put together an offer. The seller can accept the offer, make a counteroffer or reject the offer altogether.

6. Apply For Your Mortgage

If the seller accepts your offer, you’ll be ready to apply for a mortgage. Lenders will typically have you fill out a standardized form called the Uniform Residential Loan Application to collect information about your finances and determine whether to grant you final approval on your loan. As previously mentioned, you’ll be facing stricter eligibility requirements and need to make a down payment of at least 10%.

7. Close On Your Second Home Mortgage

Once a lender approves you for a mortgage, it’s time to start the closing process. You’ll schedule a home inspection to get a thorough report detailing the home’s condition. You will also receive the results of the appraisal, which will tell you the market value of the home. You’ll also need to buy homeowners insurance and title insurance. Once you’ve completed the final walk-through, you’ll sign all the paperwork and pay your closing costs on closing day. Then, your second home purchase will become official.

FAQ

Here are the answers to some frequently asked questions about buying a second home.

Buying a second home could be a wise investment if you have the means to do so. The reward is often worth the risk, whether you’ll use the property for rental income or as a vacation home. It’s still essential, however, to consider the drawbacks and affordability of buying a second home before making a decision.
Lenders consider a second home mortgage a higher risk, so you’ll need to make a larger down payment than you did for your first home. One route is to use the equity in your current home to take out a home equity loan, home equity line of credit or cash-out refinance. The money you receive from this loan or refinance can then be put toward the down payment on your second home.
You’ll need a 10% minimum down payment on a conventional loan and a 20% minimum down payment on a jumbo loan. The amount is higher for a second home because lenders see these purchases as riskier. You’ll likely need to meet more stringent credit score and DTI ratio requirements to qualify.
A second home is a property you buy primarily as a residence, maybe to house a family member or use as a vacation home. It’s not bought solely to generate income, as an investment property is. That being said, you can still rent out a second home for up to 14 days a year without having to report that income on your taxes.
When you have a rental or investment property, meaning you use the house yourself less than two weeks a year, or less than 10% of the number of days you’re renting it out, you’re able to deduct your mortgage interest, property tax, operating expenses, depreciation and repairs from your taxes.

The Bottom Line

Buying a second home can be a great investment – whether you plan to enjoy it yourself as a vacation home or rent it out. Just be sure you can afford all the costs. Also, keep in mind that the process and rules will differ somewhat from your first home purchase.

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Rory Arnold contributed to the reporting of this article.

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