How To Buy A Second Home With No Or Low Down Payment
Melissa Brock6-minute read
June 25, 2021
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 a another property to spend time working by the mountains or to enjoy a vacation home by the ocean, 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.
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 more you 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.
Most lenders require a DTI of 43% or less to get approved for a second mortgage.
Great news! Rates are still low in 2021.
Missed your chance for historically low mortgage rates in 2020? Act now!
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. If you want to use this strategy, you must make your planned second home your primary home.
Learn more about the types of government-backed loans you can tap into, including USDA, VA and FHA loans.
You can get a 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.
- 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.
- Your DTI should be at about 50% or lower.
- You should have a credit score of about 640 or better.
You can qualify for a VA loan if you meet eligibility requirements as a member 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 are 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 must secure 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.
FHA loans, backed by the Federal Housing Administration under the Department of Housing and Urban Development, requires you to make a down payment. However, your lender can show you how to buy a second home with low down payment with an FHA loan. You can also tap into lower credit score minimums with an FHA loan, compared to other loans. You must:
- Have an FHA-approved appraiser appraise the home.
- Occupy the property within 60 days of closing.
- Have the home undergo an inspection and the home must meet minimum property standards.
- Make a minimum 3.5% down payment for credit scores of 580 and higher. For a 10% down payment, your credit score can be in the 500 – 579 range. Rocket Mortgage® requires a minimum credit score of 580 for FHA loans.
- Pay a mortgage insurance premium (MIP) for the life of an FHA loan unless you put 10% or more down, in which case, MIP can be removed after 11 years.
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 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, sidestepping the need for a down payment altogether.
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.
Learn more about buying a house with no money down with Rocket Mortgage.
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