How to buy a second home with no down payment

Buying another property can be an exciting opportunity to gain a vacation home while also building your equity. However, saving up enough money to make a down payment for a second home can be challenging. Getting financing for a second home is typically more difficult than funding your primary residence because lenders see these purchases as riskier. Since you won’t live there full-time, you are more likely to prioritize your primary mortgage.

Usually, you’ll need at 10% down payment for a second home and a 25% down payment for an investment property. However, there are some creative financing options you can use to acquire a second property with no down payment.

Ways to buy a second home without a down payment

Buying a second property without a down payment is possible, but it gets a little more complicated if you want to call it home. Let’s look at some potential funding options.

Explore government-backed loans

There two types 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. One possible workaround is that you could buy a home with a U.S. Department of Veterans Affairs (VA) loan ¹ or U.S. Department of Agriculture (USDA) loan for no down payment and convert your original home into your vacation or home or investment property. However, you’ll need to meet the eligibility requirements.

VA loan

VA loans typically don’t require a down payment. These mortgages are offered to those who meet service time requirements, receive VA disability, or are qualified surviving spouses. VA loans are designed to make homeownership more attainable for those who have served the country.

While VA loans can be used only for primary residences, if you pay off your previous VA loan, you can apply for a one-time restoration of your entitlement. This allows you to use a new VA loan 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 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.

Try to assume a mortgage

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

Tap into your home’s equity

Another method for coming up with funding for a down payment is 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. You can use Rocket Mortgage's down payment calculator to see how the amount of your down payment will impact payments on your second home.

Home equity loan

A home equity loan ² is a lump-sum payment you borrow using your home as collateral. 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.

While a home equity loan could get you the money you need for a down payment, it would also mean a second mortgage payment. Then, you’d have a third mortgage payment with the mortgage for the second home. If you can’t keep up with both mortgages on your primary residence, you could lose that home to foreclosure.

Rocket Mortgage offers fixed-rate home equity loans.

Home equity line of credit (HELOC)

A home equity line of credit (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 owe interest only 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. Also like a home equity loan, it means an additional monthly payment that you’ll need to be able to afford alongside your primary mortgages.

Rocket Mortgage doesn’t offer HELOCs currently.

Cash-out refinance

If you don’t want three mortgage payments, you could do a cash-out refinance. With this option, you replace your existing mortgage with a larger one and withdraw the difference to buy a vacation home.

The interest rates for a cash-out refinance are lower because it’s based on your primary mortgage, which has the first priority for payoff in the event you default. It also leaves you with one monthly mortgage payment on your existing home, while you take on a second mortgage to buy the vacation or investment property.

Look into a reverse mortgage

A reverse mortgage allows seniors to access the equity in their home without a monthly mortgage payment. If you’re 62 or older, a reverse mortgage could be an option to get funding for a down payment on a vacation home. However, you’ll be depleting the equity you have in your primary residence.

A reverse mortgage must be repaid 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 up the home. These are nonrecourse loans, which means the lender can’t seize your assets or savings for repayment.

Your loan amount is based on the age of the youngest borrower or non-borrowing spouse, your existing equity, and interest rates.

Rocket Mortgage doesn’t offer reverse mortgages currently.

Receive the gift of home equity

A gift of equity is a discount given by a seller off the fair market value of a home. The seller typically needs to be a family member, but not always. If the gift of equity is at least 20% of the current value of the home, you don’t have to make a down payment. Otherwise, you must 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 size 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 for several years before having to commit. Depending on the terms of your agreement, you’ll either be required to purchase or have the option to at the end of the term. If you do buy, a portion of your monthly rent may be converted to a down payment in the form of rent credit. However, it’s important to negotiate these terms upfront with your landlord.

Negotiate seller financing

Instead of using a traditional mortgage to buy a second home, you could work out a home financing agreement with the seller. Under this type of agreement, sellers typically require a down payment, but one is not legally required. It’s possible to work out a deal to roll your down payment into the purchase price. You’ll also agree to the terms of the deal and a payment schedule.

It’s important to be careful what you’re getting into with seller financing. With a traditional mortgage, there are legal protections for borrowers that won’t be there to protect you if you cut your own deal.

Second home mortgage lender requirements

If none of the above options seem right for you, then you can use a conventional loan to buy a vacation or investment property. However, you’ll need to meet the following requirements to finance a second home purchase:

• Minimum 10% down payment
• Maximum 43% debt-to-income ratio
• Six months of cash reserves
• Lenders typically require a minimum credit score of 620, though this is not enforced by Fannie Mae or Freddie Mac
• Proof of sufficient income to afford both mortgages

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 private mortgage insurance. This is coverage that protects the lender, not you, if you become unable to keep up with your mortgage payments. If you get an FHA loan, you’ll need to pay for mortgage insurance for at least 11 years.

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. 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 both a primary home and a second home on your taxes, up to certain limits. However, something to keep in mind is that you can deduct interest from utilizing home equity only 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: Buying a home with no down payment is possible

Purchasing a second property can give you the opportunity to build equity, have a vacation retreat of your own, and earn rental income. However, a second home can also be a major financial undertaking that requires not only a second mortgage but also steep upfront costs. While some government-backed loans do not require a down payment, they do require that you live in the home as a primary residence. However, there are some creative ways you can still finance a second home purchase without saving up a big down payment.

By converting your new home into your primary residence or borrowing against the equity in your current home, buying another home with no down payment can happen.

When you are ready to confidently expand your real estate horizons, you can start your mortgage application with Rocket Mortgage.

¹ Rocket Mortgage is a VA approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

² Home Equity Loan Product is a second standalone lien and may not be used for piggyback transactions. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Not available on Ameriprise products. Additional restrictions, terms, and conditions apply. Must meet qualification requirements. This is not a commitment to lend.