Buying A Second Home: A How-To Guide

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 getaway from everyday life.

If you’ve been thinking about purchasing a second home, here are some key considerations and tips for getting started.
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What Is A Second Home?

A second home is property you purchase in addition to your primary residence that you intend to live in for part of the year. Secondary homes are different from most investment properties because your lender may have limitations on when you need to occupy the residence and when you can rent it out to prospective tenants.

With Rocket Mortgage^®, a 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.

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. Below are some of the most common ways to use a second home.

Vacation Home

If you have a large family, vacation often or 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, a jumbo loan or conventional loan is 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. We’ll discuss your mortgage options for a second home later on in the article.

Secondary Residence

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.

Investment Property

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 than other types of second homes, like vacation 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. Government-backed loans such as Federal Housing Administration (FHA) loans and Department of Veterans Affairs (VA) loans also can’t be used to finance investment properties.

Make sure to speak with your mortgage lender to make sure your mortgage matches your real estate investing goals. At Rocket Mortgage, you can get a jumbo loan on an investment property starting at a 20% down payment, depending on the property type and 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.

Can You Afford A Second Home?

Are your personal 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 before buying a second house.

Down Payment And Interest Rates

As with purchasing any new home, 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 mortgage lenders because there’s greater chance borrowers will default on a second home (versus a primary residence) in the event of financial hardship.

The same logic can be applied to mortgage interest rates. To hedge against potential losses in the event of a mortgage 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 housing 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.

Monthly Budgeting

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 go