Buying a second home: Costs, requirements and steps

This article is for informational purposes only and is not intended to provide, and should not be relied on for, medical, legal, financial, or tax advice. You should consult with a qualified professional for advice specific to your situation. Consumers should independently verify that any services, products, or programs referenced meet their needs and comply with applicable requirements.

Buying a second home can give you a reliable place to vacation, work, visit family, or spend part of the year. You may also want to rent out the home when you aren’t using it. Whatever your goal, buying a second home calls for a clear plan for financing, ongoing costs, and how you’ll use the property.

The process isn’t simply a repeat of your first home purchase. Your lender will consider the obligations tied to both homes, your available reserves, and whether the new property qualifies as a second home rather than an investment property.

Key takeaways:

• Your intended use of the second home affects its mortgage classification, qualification requirements, insurance, and tax treatment.

• Rocket Mortgage requires at least 10% down for a qualifying second-home purchase, although some situations require more.

• A complete budget should account for both mortgage payments and the year-round expenses of owning another property.

What is a second home?

A second home is a house you own in addition to your primary residence. It may be a vacation property, a home near work or family, or another residence you occupy during part of the year.

Your lender won’t classify a home based only on what you call it. The lender will consider your intended occupancy, how often you’ll use the property, and whether earning rental income is its primary purpose.

Second home vs. investment property

When comparing second homes and investment properties, intended use is the main distinction. A second home is primarily for your personal use, while an investment property is primarily owned to generate income through rent, resale, or another investment strategy.

With Rocket Mortgage, a property may qualify as a second home if you rent it for no more than 180 days during a calendar year. You must also occupy it for at least 14 days or 10% of the number of days you rent out your house, whichever is greater.

These are mortgage qualification requirements. IRS rules for rental income, expenses, and qualified second homes are separate, so a home’s lending classification may not match its treatment on your tax return.

Can you afford a second home?

You can afford a second home when your budget can handle the up-front purchase costs, monthly payment, and year-round expenses of another property without draining your emergency savings. Start with the full cost of ownership rather than focusing only on whether you qualify for a mortgage.

Down payment

A down payment is the money you pay toward the home’s purchase price at closing. Rocket Mortgage requires a minimum down payment of 10% for a qualifying second-home purchase. Your required amount may be higher based on your credit, loan amount, property, and overall financial profile.

Home buyers exploring how to buy a second home with no down payment may really be looking for a way to avoid using their own savings. Rocket Mortgage requires at least 20% down when gift funds are the sole source used for the down payment on a second home. Otherwise, the minimum down payment is 10%, with 5% from the client.

Alternatively, you may be able to buy a new primary residence with an eligible VA loan or USDA loan, then convert your current residence into a second home.¹ The new property must become your primary residence because the government-backed loan isn’t financing the second home directly.

Rocket Mortgage doesn’t offer USDA loans at this time.

Interest rates

Lenders may charge slightly higher mortgage interest rates for vacation homes because they can view a second home as a greater lending risk. During financial hardship, a client may be more likely to default on a second-home loan before the mortgage tied to their main home.

Your actual rate will depend on factors such as your credit history, down payment, debt-to-income ratio, property type, loan amount, and market conditions.

Debt-to-income ratio requirements

Your debt-to-income ratio (DTI) compares your required monthly debt payments with your gross monthly income. To calculate it, divide your monthly debt payments by your income before taxes, then multiply the result by 100.

A DTI of 43% or less is a useful guideline when preparing to apply for a second-home mortgage. Your lender will consider qualifying obligations associated with both homes, and the maximum allowed DTI can depend on your full loan profile.

Cash reserves

Cash reserves are funds you have left after paying your down payment and closing costs. They can help you continue making payments if your income is interrupted or the home needs an unexpected repair.

For Rocket Mortgage clients, 2 months of housing payments is a good baseline. Reserve requirements for jumbo loans may range from 6 – 18 months, depending on the loan amount.²

Insurance, utilities, taxes, and HOA fees

Build year-round expenses into your budget, even if you’ll occupy the home only seasonally. These costs may include homeowners insurance, utilities, property taxes, security services, and homeowners association (HOA) dues or assessments.

A second home may cost more to insure because it’s occupied less often, sits in a location with added weather or environmental risks, or is rented to others. Vacation-home features such as pools and hot tubs may also affect insurance costs and liability needs. Speak with an insurance professional about your intended use.

Maintenance and property management costs

Another home means another roof, heating system, yard, and set of appliances to maintain. Include routine service, emergency repairs, seasonal preparation, landscaping, cleaning, and travel to the property in your budget.

If the home is far from your primary residence, you may need a local caretaker or property manager. That support can be especially useful when guests or renters use the property.

Uses for a second home

A second home can serve several purposes, but its primary use should guide your location, budget, insurance, financing, and tax planning.

Vacation home

A vacation home gives you a familiar place to stay during weekends, holidays, or part of the year. Before buying a vacation home, consider how often you’ll visit, how long it takes to get there, and who will care for it when it’s vacant.

A home that looks affordable on paper may be less practical if travel, seasonal upkeep, or limited use adds more cost than value for your household.

Secondary residence

A second home may function as a secondary residence near a job, school, medical provider, or family member. Retirees may use another home during part of the year, while frequent business travelers may prefer a residence over repeatedly booking accommodations.

Think about whether the location is likely to remain useful as your work, health, family, or retirement plans change. If you’re considering buying a second home in retirement, it's important to understand how lenders view retirement income.

Rental income

You may rent a second home when you aren’t using it, but rental activity can affect your mortgage classification, insurance, local compliance, and taxes.

Under the IRS minimal-rental-use rule, you generally don’t report rental income when you use the home as a residence and rent it for 14 days or fewer during the year. You also can’t deduct rental expenses for that period. If you rent it for 15 days or more, you generally report the income and may deduct allowable rental expenses, subject to rules for dividing personal and rental use.

Don’t base your purchase budget on the assumption that rental income will always cover the mortgage. Demand, occupancy, repairs, local restrictions, and management costs can change.

Pros and cons of buying a second home

The pros and cons of buying a second home depend on your goals, finances, and how often you’ll use it. A balanced review can also reveal reasons not to buy a second home before you take on another long-term obligation.

Pros of buying a second home

• Dependable access: You’ll have a familiar place to stay in a location you visit regularly.
• More control: You can furnish and use the home around your household’s needs instead of relying on available rentals.
• A gathering place: The home may give family and friends a consistent place to spend time together.
• Possible rental income: Renting the home during periods of nonuse may offset some expenses, although income isn’t guaranteed.
• Potential appreciation: The property may gain value over time, but real estate values can also remain flat or decline.

Cons of buying a second home

• Another set of expenses: You’ll be responsible for the mortgage, taxes, insurance, utilities, maintenance, and possible HOA dues.
• More upkeep: A distant or seasonal property may need local help when you aren’t there.
• Rental complexity: Renting can introduce tax reporting, insurance, licensing, and local-rule requirements.
• Less flexibility: Selling a home generally takes more time and effort than ending a short-term rental or hotel reservation.
• Market risk: Rental demand and property values can change, so buying a second home isn’t a guaranteed investment.
• Specialized risks: A waterfront property, for example, may involve added maintenance, insurance, and environmental considerations.

How to buy a second home

Buying a second home begins with a clear purpose and a budget that accounts for both properties. These four steps can help you prepare.

Define your goals

Decide why you want the home, how often you’ll use it, and whether you expect to rent it. Buying a home in the middle of the city close to where you work is very different from buying one on a lake for its vacation and rental potential. Also consider how long you plan to own it and what change in your finances or lifestyle would cause you to sell.

Your answers can shape the location, home type, loan, insurance, and amount you’re comfortable spending.

Review your finances and home equity

Review your income, current debts, emergency savings, available down payment, and expected reserves. Build a monthly budget that includes both homes, plus room for repairs and other unexpected costs.

Some owners use a home equity loan to buy another property.³ This can provide funds without selling the first home, but it adds another payment and places the home securing the loan at risk if you can’t repay it.

Research the property, location, and local rules

Research property taxes, insurance availability, HOA restrictions, rental licensing, zoning, weather exposure, and access to local maintenance help. Review the home’s condition and consider an inspection before committing.

Location-specific planning matters. For example, buying a home in Florida may call for added attention to insurance, severe-weather exposure, and local short-term-rental rules.

Prepare your application and get approved

Organize recent income records, asset statements, current mortgage information, and documentation for your down payment. Be ready to explain how you’ll use the new home and whether you expect to rent either property.

A mortgage approval can help you understand the loan amount you may qualify for, but it doesn’t replace your own affordability analysis. Choose a purchase price that leaves room for your other goals and unexpected expenses.

Buying a second home without selling the first

You may be able to buy another home without selling the one you own, but you’ll need a plan for the costs and intended use of both properties. The new home isn’t necessarily a second home for mortgage purposes just because it’s the second property you purchase.

Renting out your first home

If you move into the new property as your main home and rent the first one, the new property may qualify as your primary residence. The former home may then be treated as a rental or investment property.

Before becoming a landlord, review your current mortgage terms, insurance, local rental rules, expected vacancies, maintenance plan, and tax responsibilities. Ask your lender whether and how rental income may be considered during qualification rather than assuming all projected rent will offset the first mortgage.

Buying a second home when your first is paid off

Paying off the first mortgage may lower your monthly debt obligations, but the property still has taxes, insurance, utilities, and maintenance costs.

A paid-off home may also provide equity  you can borrow against. Remember that accessing the equity creates a new lien and payment, so the first home is no longer debt-free once the loan closes.

Managing two mortgage payments

To manage two mortgage payments, test your budget against more than a normal month. Consider what happens if the second home sits vacant, the property needs a major repair, insurance costs rise, or your income changes.

A sustainable plan shouldn’t depend entirely on rental income or future appreciation. Maintaining reserves can give you more room to adapt when costs don’t follow the original forecast.

Types of loans for buying a second home

You can finance a second home with a mortgage on the new property or by using equity from a home you already own. Each option changes your payments, closing costs, and the property placed at risk.

Conventional mortgages

A conventional mortgage can finance a qualifying second-home purchase. The lender may review your income, credit, DTI, down payment, reserves, property type, and intended use.

Rocket Mortgage requires at least 10% down for a qualifying second home, but meeting the minimum doesn’t guarantee approval.

For many home buyers, jumbo or conventional conforming loans are the best options for a vacation home mortgage. It’s important to remember that this mortgage process is similar to taking out a loan on your primary home, just with slightly stricter requirements.

Home equity loans

A home equity loan provides a lump sum secured by equity in an existing home. This type of loan allows you to borrow against the difference between your home's current fair market value and what you owe on it. It’s important to remember that this does not replace your current mortgage; rather, it creates a new, separate loan that you will need to pay each month in addition to your current one.

You may be able to deduct second mortgage interest if you use the loan to buy, build, or substantially improve the home that secures the debt, subject to IRS requirements and deduction limits.

HELOCs

A home equity line of credit (HELOC) is revolving credit secured by your home. You can generally borrow up to an approved limit during a draw period and repay what you use.

HELOCs may have variable rates, so payments can change. Falling behind may put the home securing the line at risk. Rocket Mortgage doesn’t offer HELOCs at this time.

Cash-out refinances

A cash-out refinance replaces an existing mortgage with a larger loan and provides part of the difference in cash after closing costs and other required amounts are paid.

This option changes the balance, rate, term, and payment of the existing mortgage. Compare those changes with a separate home equity loan before deciding which structure fits your goals.

Loan types you generally cannot use for second homes

Government-backed purchase loans are designed for primary residences. You can’t use an FHA, VA, or USDA purchase loan to buy a vacation home or another property intended to be a second residence from the start.⁴

You may still be able to use an eligible VA or USDA loan to purchase a new primary residence and convert the home you already own into a second home. In that situation, the government-backed loan finances the new primary residence rather than the second home.

Tax implications of buying a second home

The tax implications of buying a second home depend on how you use it, how it’s financed, and whether you rent it. Tax rules change, so use this section as a starting point and discuss your situation with a qualified tax professional.

Mortgage interest deductions

You may be able to deduct qualifying mortgage interest if you itemize and the debt is secured by a qualified main or second home. The IRS generally limits the deduction to interest on the first $750,000 of qualifying debt, or $375,000 for married taxpayers filing separately.

Higher limits of $1 million and $500,000, respectively, may apply to qualifying debt incurred before December 16, 2017. These limits apply to the combined mortgages on the main and second home.

The date of the debt, amount borrowed, use of the proceeds, rental activity, and personal use can all affect the deduction. A rented second home must also meet IRS personal-use requirements to qualify as a second home for the mortgage-interest deduction.

Property taxes and state and local tax caps

State and local real estate taxes you paid may be deductible if you itemize. They count toward the overall state and local tax deduction limit of $40,000, or $20,000 for married taxpayers filing separately. The limit may be reduced for taxpayers with modified adjusted gross income above the applicable threshold.

Because the deduction and income thresholds can change, verify the rules for the tax year you’re filing.

When to speak with a tax adviser

Consider speaking with a tax professional when you’ll combine personal and rental use, own homes in different states, use home equity to fund the purchase, claim rental expenses, or sell the property.

Keep records of rental days, personal-use days, income, repairs, improvements, mortgage interest, and property taxes. Clear records can make it easier to determine which rules apply.

FAQ

Here are answers to common questions about buying a second home.

Is it a good idea to purchase a second home?

It may be a good idea when you have a clear purpose for the property, can afford the full ownership costs, and have enough reserves to manage unexpected expenses. It may be a poor fit when the purchase stretches your budget or depends on uncertain rent or appreciation.

Whether buying a second home is a good investment depends on your goals, holding period, costs, property performance, and local market. Neither rental income nor appreciation is guaranteed.

Do I have to put 20% down on a second home?

No. Rocket Mortgage requires a minimum of 10% down for a qualifying second-home purchase. Your required amount may be higher based on the loan and your financial profile.

When gift funds are used toward a second-home purchase through Rocket Mortgage, the down payment must be at least 20%.

What is the IRS rule for second homes?

Several IRS rules may apply. For mortgage-interest purposes, a rented second home must generally be used personally for more than 14 days or more than 10% of the days it’s rented at a fair rental price, whichever is longer, to be treated as a qualified second home.

A separate minimal-rental-use rule generally says you don’t report rental income when you use the property as a residence and rent it for 14 days or fewer. You also can’t deduct rental expenses for that short rental period.

Can I use an FHA loan to finance a second house?

You can’t use an FHA, VA, or USDA purchase loan to buy a home intended to be a second residence. These government-backed purchase programs require the financed property to serve as a primary residence.

If a property was previously your primary residence and already has an eligible government-backed mortgage, you may be able to refinance it with an FHA Streamline or VA Streamline.^5,6

Can I buy a second home without a mortgage loan?

Yes. You can buy the property with cash and avoid placing a mortgage on the second home.

Can I buy a second home and rent out my first home?

You may be able to buy another home and rent out the first, subject to mortgage qualification, insurance, tax, lease, and local law requirements.

When you move into the newly purchased home as your main residence, it may be classified as your primary residence rather than a second home. The former home may then be treated as a rental or investment property.

The bottom line: Should you buy a second home?

Buying a second home may make sense when you can afford the full costs, meet the lender’s requirements, maintain adequate reserves, and have a clear plan for using the property. Review the benefits alongside the extra payments, maintenance, rental responsibilities, and market risk.

Dreaming of that vacation home of your own? Or maybe that pad in the city that makes the work commute more bearable? Whatever you’re looking for, get started 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 Rate pricing and closing costs dependent on loan qualification requirements and factors including but not limited to credit, income, assets, down payment, product selection and loan amount. This is not a commitment to lend.

³ 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.

⁴ Rocket Mortgage is not acting on behalf of FHA or HUD.

⁵ The FHA Streamline program may have stricter requirements in some states. In order to qualify for the FHA Streamline program, an immediate .5% minimum reduction in interest and mortgage insurance premium is required. Some states may require an appraisal.

⁶ The VA Streamline program may have stricter requirements in some states. In order to qualify for the VA Streamline program, you must have a VA loan. The VA Streamline is only available on primary residences. Cash-out transactions are not allowed. In order to qualify for a VA Streamline, a 0.5% minimum reduction in interest rate on the previous fixed-rate loan must occur if the new loan will be a fixed rate or a 2% minimum reduction in interest rate on previous adjustable rate mortgage loan must occur; a minimum of 6 months of consecutive mortgage payments must be paid on the current loan at the time of application. Some states may require an appraisal. Additional restrictions/conditions may apply.

This article is for informational purposes only and is not intended to provide financial, investment, or tax advice. You should consult a qualified financial or tax professional before making decisions regarding your retirement funds or mortgage.

Rocket Mortgage is a trademark or service mark of Rocket Mortgage LLC or its affiliates.