Buying A Second Home: A Guide

11 Min Read
Updated Dec. 15, 2023
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White beach house in tall grass.
Written By Hanna Kielar

If you’ve been living in your primary residence for a while now, and your income has risen so that you’ve been comfortably making your monthly mortgage payments, you might be interested in buying a second home. This can be an appealing prospect for people who 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 take a look at what’s involved in buying a second home, what the process is and what you need to know about owning one.

Reasons To Buy A Second Home

Buying a second home might be a great way for you to be closer to the people you love and places you enjoy, or it might help you accomplish your financial goals. With Airbnb making it easy to set up short-term rentals, most second homes are purchased as both a family getaway and a source of income. Here are some of the most common reasons for buying a second home.

A Place To Make Vacation Memories

If you and your family love the mountains but are tied to the city for work, you might be able to spend more time getting away if you have a vacation house in a place that you love to be. The same goes for if you have people or other places you want to establish a home nearby.

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. You can use the home as a retreat for now and retire to it later.

A Way To Diversify Your Assets

Homes tend to increase in value, so you can use your second home as a means of diversifying your investments. Your retirement accounts are almost always invested in stocks, so investing in real estate means that a portion of your investments won’t be subject to the whims of the stock market.

Like all assets, real estate has cyclical booms and busts, but over time, it holds its value. An investment property can generate a reliable source of passive income. It will also allow you to take tax deductions to recoup most of your costs. Or you might be interested in buying a fixer-upper and flipping the home after you make repairs.

A Source Of Rental Income

If you decide to rent your home, you can earn rental income to help cover the expenses of owning a second home. If you want to vacation at your home, you can rent it out short-term. If you decide to have it only as an investment property, you can rent to individuals or families on annual leases.

A Host Of Potential Tax Breaks

Many people choose to leave their second homes unoccupied when they’re not using them. If this is the case, the interest and property taxes may be fully deductible from your gross income.  The IRS also allows you to take tax deductions on property owned fully or partially for investment purposes that allow you to recoup most of your costs.

A Home For Family

You might also consider buying a house for a family member in order to keep your parents close or to rent out to an adult child. You could also consider adding an accessory dwelling unit to your own property if circumstances allow.

See What You Qualify For

How To Buy A Second Home

Now let’s look at the steps in the process for buying a second home.

1. Set A Budget

It’s extremely important to budget for having two mortgage payments unless you own your primary home free and clear. You don’t want to put yourself in a risky situation with having to juggle two mortgages.

Buyers will likely encounter a higher down payment, a higher mortgage interest rate and a higher rate for homeowners insurance with the purchase of their 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 there are no surprises at the time of closing.

2. Determine The Location Of Your Second Home

When buying a second home, it’s very important to consider the location. 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 the world, 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 property that’s centrally located within a few hours of everyone.

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

For example, you might think moving to Florida sounds great but end up in a town further 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.

3. Choose The Right Loan

There are several loans you can and can’t use to buy a second home. For example, you can take out a jumbo loan but usually can’t take out an Federal Housing Administration (FHA) loan or a Department of Veterans Affairs (VA) loan.

Additionally, there are different financial factors that lenders take into consideration when evaluating someone for a loan on a second home. For example, they’re stricter on a person’s debt-to-income ratio (DTI) and credit score.

4. Find 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 who’s familiar with the local area is a good idea, especially if you’re looking for a vacation property that’s close to the local town, nearby beaches or other attractions.

Second Home Mortgage Requirements

In general, lenders consider second home mortgages riskier than loans made for the purchase of a primary residence. That’s because, should your financial situation worsen, you’re likely to skip your second home’s mortgage loan repayment long before you skip the payment on your home.

For this reason, you’ll have to make a larger minimum down payment – 10% for a second home as opposed to 3% for a primary home loan. You’ll also need a credit score of at least 620 and a debt-to-income ratio (DTI) no higher than 50%.

Factors To Consider Before Buying A Second Home

Although the pros make purchasing a second home sound attractive, there are a few things you should consider before making the leap.

Added Responsibility

Owning twice the property might also mean twice the work. You should consider how you will keep up the property grounds and manage the financial burden of taking extra care of your properties.

Occupancy Rules

To classify the property as your second home, you must spend a significant portion of the year there. If you have a jumbo loan or another type of nonconforming loan on your second home, you’re limited to 14 days of renting capability to another tenant. If your loan is backed by Fannie Mae or Freddie Mac, though, you can rent the property out for up to 180 days without it being considered an investment property.

Keep in mind that, if you rent the property out for 15 days or more, you’ll have to report the income to the IRS. However, along with that, you may be able to deduct certain rental expenses. You have to occupy the home for at least 14 days or 10% of the days it would otherwise be rented out – whichever is greater – to maintain your eligibility for the mortgage interest deduction.

Lenders will probably also consider it an investment property if you don’t follow these IRS minimum guidelines for residency.

Maintenance

There are some property maintenance factors you’ll need to think about for your second home. Determine how utilities will be handled during the times when you aren’t staying in your second home.

You’ll need to decide whether you want to keep them all active and pay for them in full even when you aren’t there, which utilities would potentially be safe to shut off while you aren’t using them, which utilities should be kept on and more.

For example, you may want to consider leaving some lights on for security purposes. You can’t be in two places at once, so you may need to consider the security of your unoccupied home.

You should also consider seasonal home maintenance when purchasing your second home. You may need to have some work done intermittently when you aren’t there, such as winterizing a home or maintaining the lawn. Some things might be aesthetic, whereas others might help to prevent damage to your home.

Additional Expenses

There may be additional expenses involved in getting from one property to the other. For example, if you live in Ohio but plan to spend a few weeks a year at your second home in Florida, you should factor in travel costs when calculating whether you can afford it.

FAQs About Buying A Second Home

Here are a few frequently asked questions individuals have when it comes to buying a second home.

What is the minimum down payment requirement on a second home?

The minimum down payment requirement for a second home mortgage is 10%. Depending on the loan that you choose to use, this number could be higher and certain requirements may apply in order to qualify.

Can I use the equity in my current home as a down payment on a second home?

You can use the equity in your current home to buy a second home by taking out either a home equity loan or a cash-out refinance. The money that you receive from this loan or refinance can then be put towards the down payment on your second home.

What credit score do I need for a second home purchase?

In addition to a 10% down payment, second home buyers will need a credit score of 620 and a DTI no higher than 50% to qualify for a second home loan. If you plan to rent the home, your lender will consider future income toward qualifying for a loan.

Can I buy a second home with an FHA or VA loan?

In general, Federal Housing Administration (FHA loans) and Department of Veteran Affairs (VA loans) are unavailable to second home owners, although borrowers can in some cases have more than one FHA loan.

For example, you could use an FHA loan to purchase a multiunit property, fulfill the owner occupancy requirement – generally 1 year – and then purchase a new multiunit or single-family home with a second FHA loan. As long as you intend to make the second home your primary residence, and fulfill your new owner occupancy requirements, you’ll be complying with the provisions of your home loan.

Should I buy a second home?

If you have the means to do so, buying a second home could be a wise investment. Whether you’ll be using the property for rental income or as a vacation home, the reward is often worth the risk. It’s still important, however, to consider the drawbacks of buying a second home before deciding to buy.

The Bottom Line: An Great Investment In Your Future Dreams

People purchase second homes for many different reasons, all worthwhile. If you can afford the additional costs and responsibilities of second homeownership, it’s a great way to invest in your future.

Ready to start the process of buying a second home?  so you can begin your hunt for a second property.

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