Second Home Mortgage Guide

One of the big challenges to acquiring a second home is to get the money to buy it. This, for most of us, means a mortgage, and the mortgage rules for a second home actually vary considerably from those that apply to a primary residence.

This article will walk through the need-to-know details about getting a mortgage for your second home.

First of all, it’ll be important to differentiate between a second home and an investment property.

If your home is in fact a second home, go ahead and read on, this is the article for you.

Second Home Mortgage Basics

The way money is loaned out for a non-primary residence is different than it is for your primary home. As you can imagine, when times are tough people prioritize the payments on their primary residence over those for secondary homes and investment properties. Lenders understand this and will put buffers in place — in the mortgage terms — in order to protect themselves from your inability to pay.

For example, the required downpayment on a second home will generally be larger for a second home than for a primary residence. Now the specific amount will very based on the home, your finances, the mortgage company, and many other factors, but you might be able to get away with, say, a 15% downpayment on your primary home where 20% or even 25% might be more standard with a second home. Again, this is just a general guideline, but these things can have a major impact on your home buying experience… and your finances!

These restrictions mean the it’s harder to get a mortgage for a second home, particularly if you already have a mortgage or you have rent you have to pay on your primary home.

There are other restrictions at play as well, such as the fact that certain types of loans will not be applicable for your secondary home. These include Veteran’s Affairs (VA) direct or VA-backed loans or Federal Housing Administration (FHA) loans, both of which are popular methods to secure a primary home loan.

The mortgage of a second home will also be more stringent with financial indicators which you might have little control over on the short term. For example the lender will be more concerned with your credit score and your debt-to-income ratio on a second home mortgage than they are with a home in which you’ll be living in full-time.

Definition Of A Second Home

A second home is a place where you spend part of the year but don’t live full-time. Some guidelines for defining a second home are:

  • You usually spend at least two weeks a year there
  • It’s over 50 miles away from your primary residence

A second home is often a vacation home, but it doesn’t have to me. If you live in New York for part of the year and Florida for the rest, the New York home can certainly be a secondary residence without being a “vacation home.” And because you spend over two weeks a year in the NY home, it can be an actual home, not an invest property. This can be true even if you do rent it out, so long as the renting is not the primary reason for ownership of the home.

This definition is important because it’s going to directly impact not just your ability to get the mortgage, but also the amount you’ll pay on the mortgage. Lending rates on investment homes, including homes bought with the primary intention of renting out, are traditionally higher than rates on second homes (and second homes often have a higher rate than those seen in primary residences, though this can vary based on the institution’s view of your ability to pay for the mortgage over its lifetime).

A red flag for second home versus investment property evaluations will often involve distance. If you live, say, 20 minutes away from your “vacation home” it will likely be considered an investment property. Similarly if you have primary residence in the city but then two properties in a vacation area nearby, say on a lake, only one of them will be considered a second home as the other is duplicative and overwhelmingly likely it’s used for rentals or a similar investment activity. This is true even if the homes are in an area where vacation homes are prevalent, simply due to the impracticality of having two vacation homes so close to one another.

In other words, in the case of an audit you’ll have remember there is a human on the other side of the evaluation!

Are Rates Higher?

What about lending rates — are they higher on second homes vs. primary residences?

Yes, this is often true.

It’s hard to generalize given how varied the locations are and how diverse the set of buyers can be but, on the whole you should expect to pay more for a mortgage on a second home and/or investment homes. This can feel like a penalty, but the lenders see a higher likelihood of default on secondary homes so they much protect themselves, which means higher rates.

It’s hard to say exactly how much this will be as lending environments change so much year to year and the housing markets in vacation home areas in particular are often known for their fluctuations. That said, a rate include of 0.5% would not be unheard of, which might put your 4.0% mortgage at a considerably more expensive 4.5% on a 30-year fixed rate mortgage. This, of course, is just a general example and it’s something you’ll need to discuss with the lending institutions you are evaluating.

A larger downpayment is usually the best way to offset this. This lowers the risk level of the lender and decreases the monthly payment, while being an indicator (although not always a strong one) of your ability to pay the mortgage in the future.

Don’t be surprised if 25% is the minimum amount of down payment for an investment property, though it’s common to get away with less for a vacation home if you have excellent credit.