Buying A Second Home: A How-To Guide
Miranda Crace8-Minute Read
April 17, 2023
Have you considered buying a second home? A secondary property can be a great investment in your future. It can also help you earn additional income and provide a retreat from everyday life.
If you’ve been thinking about purchasing a second home, here are some key considerations and tips for getting started.
Uses For A Second Home
Some buyers already have a clear vision for their second home before making their purchase, but it’s okay if you’re not sure. Consider your options – they may even change your location. It’s important to note that with Rocket Mortgage®, the property may qualify as a second home if you rent it out for no more than 180 days in a calendar year. You must also reside in the home for either 14 days or 10% of the days you rent out the property, whichever is greater.
If you have a large family, you vacation often or you simply want your own spot to call home when you’re away, a vacation property might be what you’re looking for. You should choose a location you love visiting and exploring. For many home buyers, jumbo loans or conventional loans are the best option for a vacation home mortgage. It’s important to remember this mortgage process is similar to taking out a loan on your primary home – just with slightly stricter requirements.
Does your job require a good deal of travel or time spent in another city? You might consider using your property as a secondary residence. Buying a second home in a location you frequent for work or other purposes can allow you to come and go without having to worry about booking other accommodations. As with a vacation home, a mortgage for a second residence will likely come with stricter requirements.
Some homeowners will buy a second home as an investment property. Typically, this means either flipping and reselling the home, or turning it into a rental property. Investment properties have different requirements and mortgage rates for second homes. For example, many homeowners can’t use a jumbo loan to finance an investment property, because many lenders consider it an “investment” if rented out more than 14 days of a year. This is unlike a conventional loan where you can rent your second home for up to 6 months. Federally backed loans such as FHA loans and VA loans are also out of the question. Make sure to discuss in detail with your mortgage professional to make sure your mortgage matches your goals. At Rocket Mortgage, you can get a jumbo loan on an investment property starting at a 20% down payment, depending on the number of units you want.
You can use your second home for any combination of the reasons discussed above. You could vacation there for a designated period of time and rent it out via Airbnb and short-term leases for the rest of the year.
See What You Qualify For
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Can You Afford A Second Home?
Are your finances ship-shape to the point that you can afford to buy a second home? Even if you plan to collect rental income from the property, you’ll want to be sure it’s a purchase you can afford – particularly if it will remain vacant for several months a year.
Here are some financial factors to keep in mind.
Down Payment And Interest Rates
As with purchasing your primary residence, buying a second home will require a down payment and a mortgage (with interest, of course) – unless you plan to pay with cash.
In fact, a higher down payment for a second home is required. Why? Purchases of a second home are a higher risk for a mortgage lender because of the greater chance of default on a second home (versus a primary residence) in the event of financial hardship.
The same logic can be applied to interest rates as well. To hedge against potential losses in the event of a default, there’s almost always a higher interest rate on a second home mortgage. To determine the terms of your loan for a second home, your lender will take a look at your credit score and history, current market conditions, and your debt-to-income ratio (DTI).
Debt-To-Income Ratio Requirements
You’ll have to meet DTI requirements to qualify for a mortgage on a second home. DTI refers to the amount of debt you hold versus the amount of money you make. You can quickly calculate your DTI by adding up the monthly debts you pay and dividing by your monthly pre-tax salary.
Most lenders require a DTI of 43% or less to approve you for a second mortgage.
You may be approved for a second mortgage on paper, but you’ll want to crunch the numbers to see if an additional mortgage makes good financial sense. The best way to do this is by adding up all of your monthly payments and subtracting this number from your monthly net income. The remaining money is where your second mortgage payment will come from.
You might be counting on rental income to help balance out your second mortgage payment, but you’ll still want to make sure you can afford the payment on your own if your property doesn’t rent as quickly as you’d like.
In addition, you’ll want to consider property taxes, homeowners association fees and general upkeep costs before making this decision.
You’ll also want to be prepared for the cost of buying a rental property and the maintenance that comes with it. As both owner and possibly landlord, you’ll be responsible for handling all repairs and damages. This could mean paying a repair person for services, purchasing paint, doorknobs and other home improvement products, or paying a lawn service to maintain the yard.
Save at least 10% of the yearly rent for upkeep and property management. If your property rents for $2,000, the yearly rent would be $24,000. Therefore, you should save $2,400 in case of emergency repairs. Keep in mind, repairs could cost more or less than this estimate, so it’s always a good idea to have more money saved.
How To Buy A Second Home
If you’ve already been through the process of buying a house, you know there’s a lot to keep track of.
Ready to start looking for your second home? Here’s a complete list of the steps you need to take when considering how to buy a second house.
Step 1: Decide Where To Buy Your Second Home
Deciding where to purchase your next property is a major decision. Should you get a home close to your family? Or would you prefer one on a beach, in the mountains or in a city you love?
It’s important to discuss locations with your spouse and other family members who might need to be included in this decision. From there, spend time researching the best local neighborhoods. Partner with a local real estate agent so you find the best areas for a second home. Plus, this makes the next step of the home buying process – preapproval – much easier. Doing research ahead of time about your new location, teaming up with a real estate agent in that area and calculating your finances within the new area will show upfront initiative to your lender as you navigate the mortgage process for your second property.
Step 2: Get Preapproved For A Mortgage
For a couple of reasons, it’s important to start the financing process as soon as you’re ready to start looking for a home. First, starting the process early will eliminate any financial obstacles during closing, helping you close on time with no surprises.
Second, getting preapproved early will give you a better idea of how much you can finance for your second home, which is helpful once you start shopping for houses.
You can shop around for local lenders or research options online. Rocket Mortgage allows you to finance your second home completely online and provides helpful tools to guide you through the process. The income verification process is also fast and easy since Rocket Mortgage allows you to instantly verify your income with online documentation.
Step 3: Find A Local Real Estate Agent
Your real estate agent is the most important person in this second home process. They’ll work to find you the perfect home and negotiate on your behalf, and they’ll be there to guide you through the rest of the buying journey.
Be sure to look for an agent local to the area where you’ll be purchasing. They’ll know the intricacies of the real estate market better than a regional agent, which means they can offer advice on finances and neighborhoods to explore.
When you search for a REALTOR®, be sure to look for a buyer’s agent only. Working with a dual agent, or an agent who represents both you and the seller, can cause conflicts of interest.
Step 4: Find Your Dream Second Home
Your agent can help you find your dream second home after you’re preapproved for a mortgage. They’ll assist you in finding homes that fit your criteria (number of bedrooms, square footage, location, amenities, etc.) and will show you homes that fit your budget and preferences.
Once you’ve found the home you want to buy, your agent will work with you to make an offer with the selling agent and negotiate any counteroffers. The next step begins once your offer is accepted.
Step 5: Close On Your Second Home
When the seller accepts your offer, it’s time to begin closing on the home. The closing process takes 30 – 40 days, on average, and includes several steps:
- Choose a real estate attorney or closing agent. Depending on the state you’re closing in, you may need a real estate attorney to handle the settlement and closing paperwork. Your buyer’s agent can help recommend a trustworthy attorney to represent your interests.
- Buy homeowners insurance. You’ll need to confirm proof of your homeowners insurance at closing in order for your lender to release your funding. Shop around for local policies and be sure to review extra damage protection (flood, wind, hail, etc.) depending on your home’s location.
- Buy title insurance. You’ll also work with a title company to research any outstanding liens on the property and make sure it’s clear to buy. Your title company will issue title insurance to protect your purchase.
- Wait for appraisal results. Your lender will arrange for a home appraisal to ensure your home’s value is accurate. If the value is the same or higher than the listing price, you’ll move on to the next step. If it comes in lower, you’ll work with your agent to negotiate with the seller’s agent and decide if the property is still a worthwhile investment.
- Schedule your home inspection. Your home inspection is separate from the appraisal and does a more thorough examination of the property. You’ll work with your agent to negotiate with the seller on pricing or repairs if issues are found. If no issues are found, you’ll move on to the next step.
- Arrange a final walk-through. You fell in love with the home during your tour, but you’ll want to schedule a final walk-through to ensure the home is move-in ready.
- Close on your second home. The last part of the process is paying closing costs, signing all of the closing paperwork and receiving your keys. Your agent, closing agent or attorney will manage this process to ensure all paperwork is in order.
The Bottom Line
Buying a second home is an excellent way to expand your real estate portfolio and generate another stream of income. Before you buy your home, determine how you’ll use it and which location makes the most sense. Once you’ve budgeted and decided to invest in a second home, start thinking about the first stage of home buying – getting preapproved on a mortgage. This step is so crucial to deciding how much of your second home you can finance. Luckily, Rocket Mortgage can help speed up the buying process with a fast, intuitive mortgage application and quick approval process.
Learn more about how Rocket Mortgage can partner with you and get approved today. You can also give us a call at (833) 326-6018.
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