Second Home Mortgage: How to Finance Your Vacation Property

Whether you want a beachfront condo or a lakeside cottage, owning a second home is a dream for many. However, to turn that dream into reality, you’ll likely need to get a second home mortgage.

Second home mortgages aren’t the same as conventional mortgages. They often have stricter lending requirements and come with higher interest rates and other costs. But they’re still within reach as long as you know what to expect.

Below, we’ll look at how second home mortgages are unique, what financial considerations you’ll need to keep in mind, and how these mortgage products work.

Second home mortgages vs. conventional mortgages

Second home mortgages typically have stricter lending criteria than mortgages used for a primary residence. Lenders associate second homes with increased risk, especially if you’re already paying a conventional mortgage. They’ll want to see additional proof that you can make the payments on a second mortgage.

Some of the differences between applying for a second home mortgage vs. a primary residence mortgage include:

• Higher credit score: Credit score requirements are typically higher for a second home, usually around 640–700+. The best rates are often reserved for scores of 740 and up. In contrast, you can get a mortgage for a primary residence with a credit score of around 580–620.
• Debt-to-income ratio: Second home mortgages usually have a maximum debt-to-income (DTI) ratio of 43% of your gross monthly income. While this is similar to regular mortgages, the fact that your second home mortgage may be on top of your existing mortgage means staying under this DTI cap can be more challenging.
• Cash reserves: Lenders require you to have enough cash on hand to cover at least 2–6 months of mortgage payments for not only your second home mortgage but also your regular mortgage. This requirement covers the principal, interest, taxes, and insurance for both mortgages.
• Employment and income: Lenders will want proof of stable employment and income from the last two years. For self-employed borrowers, the standards are even stricter, and lenders may need tax returns and bank statements covering an even longer time period.

Second home mortgage rates and fees

Second home mortgage rates and fees tend to differ substantially from mortgages for primary residences. These differences can affect everything from your initial down payment to your monthly mortgage amounts.

• Minimum down payment requirement: While you can get a conventional home loan with a down payment as low as 3–5%, for a second home, you’ll need to put around 10–25% down. In fact, many lenders prefer down payments of at least 20%, which eliminates the requirement for private mortgage insurance (PMI).
• Higher interest rate: Second home mortgage rates are typically around 0.125% to 0.75% higher than they would be for a conventional home mortgage. While this might not sound like much, the difference adds up over time. For example, on a 30-year $400,000 mortgage, a 0.5% rate increase will cost you around an additional $58,000 in total interest. Make sure you calculate principal and interest early on to determine how much home you can afford.
• Additional costs: Some second home mortgages come with additional fees and closing costs. Origination fees are often higher, and many lenders charge fees for loans for vacation properties. Insurance tends to be more expensive for homes that are only occupied seasonally. Property taxes may also be higher since second homes don’t qualify for homestead exemptions.

Second home mortgage vs. rental property mortgage

A second home mortgage isn’t the same as a mortgage for a rental property. Lenders treat these two loan types very differently despite them having some similarities on the surface.

The key difference concerns how each property will be used. A second home is intended for personal use, such as a vacation home, whereas a rental property is for generating income. For lenders, second homes must be used personally for a minimum number of days each year (usually at least 14). There’s no personal occupancy requirement for rental properties.

Financial requirements also differ. Investment properties typically require higher down payments, often around 20–25%. Similarly, interest rates are generally higher for rental property mortgages since lenders view such properties as businesses with their own unique risks, like market fluctuations, vacancies, and problem tenants.

It’s also worth pointing out that while government-backed loans like FHA, VA, and USDA loans are generally only available for primary residences, there are exceptions. For instance, you can get an FHA loan for a second home in some special circumstances, although not for an investment property.

Can you rent out your second home?

Renting out your second home is possible, but there are financial implications you’ll need to consider. In some cases, you might not be able to qualify for a second home mortgage.

First, lenders have personal use requirements for second homes, which are typically at least 14 days annually. If you fail to meet the personal use requirement, your home may be reclassified as an investment property.

If you rent out your second home for more than your lender allows, you may need to refinance your mortgage into an investment property loan. Because investment property loans often have stricter requirements and higher interest rates, you should expect your monthly payments to increase.

Renting out your second home may also complicate your insurance. Many homeowner’s insurance policies don’t cover rental activities, so you may have to upgrade to a landlord policy or add rental coverage endorsements. HOAs and local municipalities may also have their own restrictions on rentals.

Finally, keep in mind that rental income is taxable, although you can also deduct related expenses. If you’re using your second home both personally and as a rental property, you’ll need to divide your expenses proportionally.

Types of loans for second homes

Most second home mortgages are simply conventional mortgages, just with stricter terms and higher rates than you’d usually get when financing the purchase of a primary residence. Conventional home loans offer variable and fixed-rate options and have terms of typically 15 to 30 years.

However, alternatives to a conventional mortgage exist. For example, portfolio and bank statement loans allow you to qualify based on your bank deposits instead of your employment status and tax returns. They’re an attractive option for self-employed borrowers who may not be able to qualify for a conventional loan despite having sufficient cash reserves. But they come with higher interest rates.

You can also use any equity you’ve built up in your primary residence to finance the purchase of a second home. For instance, you could refinance your primary residence or use a home equity line or line of credit (HELOC), which can give you a cash infusion and potentially lower rates. However, because you’ll be using your home as collateral, this path increases your overall risk.

How to buy a second home

The process for buying a second home is very similar to the traditional home-buying process, but there are some key differences. Here’s how the process usually works:

1. Get preapproved

As with a conventional mortgage, you’ll need to get preapproved for your second home mortgage first. However, there’s usually more documentation required, with tax returns, bank statements, and employment verification all essential. Your lender will also need to see that you have sufficient cash reserves to cover a large down payment as well as several months of mortgage payments.

2. Look for a second home

Your lender may impose restrictions on where you can buy a second home. Areas that are prone to flooding or forest fires, for example, might be hard to insure. Lenders may also have restrictions on certain property types, like co-ops or mobile homes. Keep in mind that vacation home markets experience seasonal fluctuations, so you’ll want a local real estate agent to help you better understand the best time to buy.

3. Negotiating with sellers

Negotiating on the purchase of a second home tends to give you a bit more flexibility since you’re not buying a primary residence. While you may have to be aggressive in competitive markets, you shouldn’t feel as much pressure to close on a deal.

Ensure that you get an inspection contingency. Because many second homes are left vacant for extended periods, they’re prone to issues, such as leaks and animal infestations.

4. Closing

If you’re purchasing a second home far from your primary residence, you may need to conduct a remote closing. You’ll need to know if state laws allow for remote closings and what additional documentation may be necessary. If you need more documentation, plan for an extended closing timeline.

Buying a second home differs from the traditional home-buying process, so you’ll want to ensure you have professional help throughout. A top local realtor is essential as they can help you navigate local markets and guide you through each step.