How to buy a second home with no down payment

You have a vacation destination that you’ve fallen in love with, and you would love having a space of your own there that you can come back to time and again. Buying a second home allows you to accomplish this. But the required second home down payment is 10%. The challenge is to come up with the money while not selling your main home. We’ll discuss how to buy a second home with some creative funding strategies.

Ways to buy a second home without a down payment

Buying a second home without a down payment is difficult, but it’s not impossible. Here are a few ways that could help make this happen.

Explore government-backed loans

There are a couple of government-backed loans that offer a low- or no-down payment option. The catch is that you can’t use these loans for second homes or investment properties. So why would we mention them here? There’s a little trick you can employ:

You buy a new primary residence with a U.S. Department of Agriculture (USDA) or Department of Veterans Affairs (VA) loan. You occupy the new home as your main home within 60 days of closing. Then your former primary residence becomes your vacation home or investment property.

VA loan

VA loans typically don’t require a down payment. Available to those who meet service time requirements, receive VA disability, or are qualified surviving spouses, they offer affordable home financing as a thank you for serving our country. But there’s also something special you should know about using a VA loan to buy a second home.

While VA loans can only be used for primary residences, if you pay off your previous VA loan, you can apply for a one-time restoration of your entitlement, allowing you to use a VA loan again to buy another primary residence without having to sell your previous home, which then becomes the vacation home.

USDA loan

Like VA loans, you can use a USDA loan to buy a primary residence with no down payment. You do have to meet certain requirements like living in in an eligible rural area. Additionally, your household income can’t be more than 115% of the area median. Once you take the new home as your main home, your previous home can be converted into a vacation home.

Rocket Mortgage^® doesn’t currently offer USDA loans, but a Home Loan Expert can help you find other financing options.

Check to see if you can assume a mortgage

If the seller of the home you’re looking at has a Federal Housing Administration (FHA) or VA loan, these are assumable mortgages. While the seller’s mortgage servicer has to approve this transfer, it would mean taking over the payments without having to make a down payment. This could also be advantageous if rates have gone up since the last time the seller refinanced.

Tap into your home’s equity

Another method for coming up with funding for a down payment would be to tap into your existing home’s equity. This involves taking on a second mortgage or taking a bigger balance on an existing mortgage, enabling you to use the existing value of your home to buy a vacation home.

Home equity loan

A home equity loan is a lump-sum payment you get based on taking a second mortgage. The advantage of this is that you don’t have to refinance your existing primary mortgage if you have a low rate you’d like to keep. Because primary mortgage holders get paid first, home equity loans and other types of second mortgages have slightly higher rates. Rocket Mortgage offers fixed-rate Home Equity Loans.¹

Home equity line of credit (HELOC)

A HELOC is also a second mortgage, but it works like a credit card. During the initial term, you can take money out and put it back in as much as you want. You only owe interest on what you take out. During the repayment period, the balance freezes and you pay back principal and interest. Because it’s a line of credit, rates are usually variable and can change every month. Rocket Mortgage doesn’t do HELOCs at this time. 

Cash-out refinance

A cash-out refinance involves refinancing your existing primary mortgage with a bigger balance. The interest rates are lower because it’s based on your primary mortgage, meaning this mortgage has the first priority for pay off in the event you default. Whether this or a second mortgage makes sense comes down to the math of a blended rate calculation. A Home Loan Expert can help you figure out your best option.

Look into a reverse mortgage

A reverse mortgage allows seniors to access the equity in their home without a monthly mortgage payment. It could be a good option to get funding for a down payment on a vacation home if you’re 62 or older. It’s due when you move out, sell the house or pass. Your heirs can refinance into a traditional mortgage, sell the home and keep what’s left after the payoff or simply give the home up. These are nonrecourse loans.

Your loan amount is based on the age of the youngest borrower or non-borrowing spouse, your existing equity and interest rates. A financial assessment is done to be sure you can handle property taxes, maintenance and home insurance. Rocket Mortgage doesn’t do reverse mortgages at this time. Speak to a financial advisor before moving forward with any decisions.

Someone gifts home equity

A gift of equity is a discount given by a seller off the fair market value of a home. The seller must usually be a family member, but not always. The advantage of this is that you don’t have to make a down payment if the gift of equity is equal to 20% or more of the fair market value. Otherwise, you have to contribute at least 5% of your own funds to the down payment.

If the fair market value of the home is $250,000 and your father is selling it to you for $200,000, that $50,000 discount is equivalent to a 20% down payment. Speak with a tax advisor about the implications of this. A gift of this magnitude would count toward the seller’s lifetime gift tax exemption.

Lease with an option to buy

Leasing with an option to buy gives you the chance to try out a property, usually over a number of years, before having to commit. If you do buy, a portion of your monthly rent may be converted to a down payment in the form of rent credit. But it’s important to negotiate this upfront with your landlord.

Negotiate seller financing

Finally, instead of a traditional mortgage, you could out to work out a home financing agreement with the seller. Under this agreement, you usually make some sort of down payment and then payments according to terms laid out by the two of you. It’s important to be careful what you’re getting into. With a traditional mortgage, there are legal protections for borrowers that may not be present with seller financing.

Second home mortgage lender requirements

If the above options don’t sound right for you, you can go the traditional route and get a conventional mortgage. This requires the following:

• 620 credit score
• Debt-to-income ratio (DTI) of 43% or lower for the best chance of qualification
• 10% down payment

Disadvantages of no down payment options

If you make a down payment of less than 20% on a conventional loan, you’ll have to pay monthly mortgage insurance. Meanwhile, USDA loans have upfront guarantee fees that can be built into the loan along with monthly mandatory guarantee fees for the life of the loan. With very few exceptions, VA loans have a mandatory funding fee that’s either paid at closing or built into your balance.

Understanding tax implications of getting a second home

One of the big tax advantages of homeownership is that you can deduct mortgage interest payments for a primary and second home on your taxes, up to certain limits. However, something to keep in mind is that you can only deduct interest from utilizing home equity if you use the loan to buy, build or improve a home. You need to be prepared to show that the loan was used toward a down payment on your vacation home.

There’s also a capital gains exclusion that applies to primary homes, but not vacation homes or investment properties, so don’t rely on that. You should speak with a tax advisor about your personal situation if you have any doubts.

The bottom line: Can you afford a second home?

Vacation homes can be a refuge. If you can afford the payment, one of the biggest challenges may be the down payment, particularly because you're not selling to come up with the funds. VA loans or other zero down payment options may be available, but there are other methods to come up with funding, including tapping existing equity and gifts of equity. If you're interested in going over your options, you can apply online.

¹ Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 2/5/2024 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00. Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Schwab products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher priced loans are not allowed on properties located in New York. Additional restrictions apply. This is not a commitment to lend.