How To Buy A Second Home With No Or Low Down Payment
Melissa Brock6-minute read
May 30, 2023
Think you might want to buy a second home? Remote work has freed up many individuals who could work somewhere other than their primary residence.
Whether you want another property to spend time working by the mountains, to use as an investment property or to enjoy as a vacation home, read this article to learn more about how to buy a second home with no down payment.
Financing A Second Home Purchase: Can You Avoid A Down Payment?
Most of the time, you must furnish a down payment when you opt for a mortgage. In fact, you must often put down a higher down payment for a second home compared to your first.
To qualify for a loan on a second home, you’ll need a down payment of at least 10% on a conventional loan. This type of loan is not backed by the federal government.
However, you can buy a second home with no down payment if you plan to pay for it completely with cash. In addition, you can buy a second home without a down payment if you use a government-backed mortgage and plan to turn it into your primary residence. In this case, your current primary residence would become a vacation home or investment property, while your principal home would be purchased with a government-backed loan through the VA or USDA.
Lenders Face Greater Risk
Lenders evaluate mortgages on second homes differently compared to primary residences because second mortgages present a higher risk of default. Naturally, homeowners must prioritize their primary mortgages over their second homes if they must default on their loans.
The higher your down payment, the less of a risk you present to lenders. In addition, the more you put down as a down payment, the lower your interest rate, which is a percentage of the principal amount.
Mortgage interest rates for second homes can range from 0.5 – 0.75% higher compared to interest rates for primary homes. Opting for an interest rate a few tenths of a percent lower can save you thousands over the course of your loan.
Lenders Have Stricter Requirements
Lenders considering a second mortgage application generally have stricter requirements for credit scores, debt-to-income (DTI) requirements and borrowers must prove that they have reserve funds available.
A high credit score will help you qualify for a second home. You likely want to shoot for a credit score of 700 or above. However, this credit score requirement varies by lender.
As mentioned, you must meet specific DTI requirements in order to qualify for a mortgage for a second home. DTI refers to the amount of debt you hold versus the amount of money you make. You add up your monthly debts and divide it by the amount you bring home.
We recommend a DTI of 43% or less to give yourself the best chance to get approved for a second mortgage.
See What You Qualify For
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Strategies For Buying A Second Home Without A Down Payment
Despite stricter lender requirements, you can see how to buy a second home with no money down. Take a look at a few options through a few types of government-backed loans.
Government-backed loans offer no and low down payment options. However, you cannot use a government-backed loan for a second home. Where this gets interesting is if you're looking to move and want to hold onto your current home as an investment property or second home.
You can use a USDA or VA loan to get a new primary residence with 0% down while also converting your current property to a vacation home or rental. The most important thing to remember is that you have to be living in the home for which you're getting the government-backed loan.
Learn more about the types of government-backed loans you can tap into, including USDA, VA and FHA loans.
You can get a United States Department of Agriculture (USDA) loan with 0% down payment if you meet eligibility requirements and the property you plan to buy exists in a USDA-eligible tract of land. These locations primarily exist in rural areas. However, you could potentially find a USDA loan in some suburban areas as well. It’s important to note that Rocket Mortgage® does not offer USDA loans.
A few requirements you must meet to qualify for a USDA loan:
- You must qualify as a U.S. resident, noncitizen national or qualified alien.
- It must be your primary residence.
- Your adjusted gross income can’t tally up to more than 115% of the median income in the area.
- You must show that you have a stable income and can make your mortgage payments based on your assets, savings and current income.
- The total amount you spend on housing should be no more than 29% of your gross (pretax) income each month. Your overall minimum debt payments can comprise no more than 41% of your monthly income.
- Many lenders require that you have a credit score of about 640 or better.
You can qualify for a Department of Veterans Affairs (VA) loan if you meet eligibility requirements as a member or veteran of the U.S. Armed Forces. VA loans require 0% down payment.
In order to qualify for a VA loan, you must meet at least one of these criteria:
- You served 181 days of active service during peacetime or 90 consecutive days of active service during wartime.
- You served more than 6 years of service with the National Guard or Reserves. You can also qualify with 90 days service under Title 32, with at least 30 days of consecutive service.
- Service time requirements don't apply if you've been discharged due to a service-connected disability.
- You’re eligible if you’re the spouse of a service member who lost their life in the line of duty or the spouse of a service member that suffered a service-related disability.
- You secured a COE, a document that shows your eligibility for a VA loan.
- Rocket Mortgage requires a minimum median credit score of 580. Other lenders may have different policies because the VA doesn't have a specific mandate.
When it comes to VA loans, you can get a one-time restoration of your full VA entitlement if you've fully paid off your prior VA loan. This would allow you to purchase your next primary property with a new VA loan while retaining your existing home to be converted to a vacation home or investment property.
Under some circumstances, you may assume an FHA or VA mortgage from the home seller through an assumable mortgage. This means that the buyer can take over the seller's mortgage. When you assume a mortgage, you do not need to make a down payment. Buyers may want to do this to finance at a seller's lower interest rates if rates have risen since the seller bought the home.
Check with your lender to find out if you can assume a mortgage if you want to go this route. The lender may have reserved the right to approve the home buyer in order for the assumption to occur.
Tapping Home Equity
Homeowners can use a cash-out refinance or a home equity loan to take cash out of their primary residence and use it to buy a second property. However, the 2017 Tax Cuts and Jobs Act eliminated the mortgage interest deduction on home equity loans unless you use the proceeds for capital improvements on the home.
If you want a second home but you're not sure if you can afford mortgage payments, property taxes and more, you can consider using the proceeds from a reverse mortgage to pay for your second home. The catch? You must be aged 62 or older.
In reverse mortgages, owners must stay in the home as their primary residence. However, you still consider it a primary residence if you spend more than half of your time in your primary home. Rocket Mortgage does not offer reverse mortgages.
Warning: No Down Payment Options Can Cost You More In The Long Run
Before you run right out and get a low or no down payment mortgage, remember that you'll need to pay for private mortgage insurance (PMI). PMI refers to required insurance premiums through government-backed loans or conventional loans. This insurance helps assure the lender that it will get its money back out of the investment if you default.
However, the less you put down as a down payment, the higher your monthly mortgage payment will be. In addition, you'll pay more mortgage interest in the long run when you put less money down.
The Bottom Line: Second Home Dreams Might Be Within Your Reach
Buying a second home with no money down is possible through several viable options. One great option is to get a government-backed mortgage and turn the home into your primary residence. You then turn your current home into a vacation home or investment property. This two-step process eliminates the need for a down payment altogether if you're looking to move.
You may also want to consider an assumable mortgage, tap your home equity or go for a reverse mortgage. Just remember to do some calculations so you know how much foregoing a down payment will cost you in the long term.
If you’re ready to start your search for a second home, get preapproved with Rocket Mortgage today.
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