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.
Here’s how to walk through the next steps if you’ve been thinking about purchasing a vacation home.
Where To Buy A 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 or other family members who might 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.
What Will The Second Home Be Used For?
Some buyers already have a clear vision for their second home before making their purchase, but it’s OK if you’re not sure. Consider your options – it may even change your location. It’s important to note that with Rocket Mortgage®, the property may qualify as a second home if it’s rented 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 the property is rented, whichever is greater.
- Vacation home: If you have a large family, you 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.
- 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.
- Airbnb: If you don’t see yourself using your secondary property that often, consider purchasing a home that could double as an Airbnb. Buying a home in a popular location will improve your chances of maintaining regular Airbnb business throughout the year. Just be sure you buy a home in an area without Airbnb restrictions.
- Short-term rental: Your home might even be largely unoccupied most of the year. If that’s the case, you can also look for short-term renters to generate additional cash flow. For instance, if you plan to use your vacation home in July and August, you could look for college or graduate students to rent your home for the rest of the year. You can also search for tenants who are looking for less than 6-month leases.
You can also use your second home for any combination of the 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.
Find out what you can afford.
Use Rocket Mortgage® to see your maximum home price and get an online approval decision.
Can You Afford A Second Home?
Are your finances ship-shape so 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.
You’ll have to meet debt-to-income 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. A quick way to calculate your DTI is to add up the monthly debts you pay and divide it by your monthly pre-tax salary.
Most lenders require a DTI of 43% or less to get approved for a second mortgage. Learn more about how to calculate your DTI.
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 to add up all of your monthly payments and subtract this number from your monthly post-tax salary. 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, in case your property doesn’t rent as quickly as you’d like.
In addition, you’ll want to take property taxes, homeowners association fees and general upkeep costs into consideration before you make this decision.
You’ll also want to be prepared for the cost of maintaining a rental property. As both owner and possibly landlord, you’ll be responsible for handling all repairs and damages. This could mean paying a handyman 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 maintenance. 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 Get Started
Ready to start looking for your second home? Here’s a complete list of the steps you need to take.
Step 1: Find A Local Agent
Your real estate agent is the most important person in this process. They’ll work to find you the perfect home, negotiate on your behalf and 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. A local agent will 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 an agent, 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 2: Get Preapproved For A Mortgage
It’s important to start the financing process as soon as you’re ready to start looking for a home for a couple of reasons. First, starting the process early will eliminate any financial obstacles during the closing process, which will help 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 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, with 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 Your Dream Vacation Home
Your agent can help you find your dream vacation home after you’re approved or preapproved for a mortgage. They’ll work with you to find 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 4: Close On Your Home
When the seller accepts your offer, it’s time to begin closing on the home. The closing process can take 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 an attorney to handle the settlement and closing paperwork. Your buyer’s agent can help recommend a trustworthy attorney to best 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 to 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 to sign all of the closing paperwork and receive your keys. Your agent, closing agent or attorney will manage this process to ensure all paperwork is in order.
Buying a vacation home is an excellent way to expand your real estate portfolio and generate another stream of income. Before you buy your home, decide how it will be used and which location makes the most sense. Once you’ve budgeted and decided a second home is a good investment, you’ll move right into the home buying process. You’ll find a local agent, get preapproved for a mortgage, find your dream vacation home and go through the closing process.
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.
See What You Qualify For
Refinancing For Home Improvements: A Guide
Refinancing - 5-minute read
December 14, 2020
Refinancing is a low-interest way to get tax-free cash for remodeling your kitchen, finishing your basement – or anything you choose. Let’s look at how you can refinance your mortgage to fund your project.
How To Refinance An Investment Property
Refinancing - 7-minute read
October 26, 2020
Let’s take a look at some of the benefits of refinancing your investment property and walk through the specific process.