A guide to second home mortgage requirements

Many homeowners dream of purchasing a second home to use as a vacation property or in preparation for retirement. While getting a mortgage on a second house follows a similar process to buying your primary residence, the mortgage requirements are more challenging. Here's everything you need to know about second home mortgage requirements and how to buy a second home.

What’s considered a second home?

A second home is a property you own in addition to your primary residence. It is used primarily for personal use, and you live in it for part of the year (at least 14 days). Second homes are typically at least 50 miles from your primary home, often located in tourist destinations, near family, or other desirable areas.

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You should not intend to rent out your second home when making this purchase. While you may rent it occasionally, you cannot rent it for more than 180 days per year without it being considered an investment property. This condition makes second homes ideal for short-term rentals more than a long-term lease.

Second home mortgage requirements

When you're ready to buy a second home, it helps to become familiar with the mortgage requirements. Getting a home mortgage on your second home differs from borrowing to purchase your primary residence or investment property.

Down payment

While many home loans for your primary residence allow down payments of 0% to 3.5%, buying a second home typically requires borrowers to have more cash. Not only must you have a down payment of at least 10%, but your mortgage lender may require cash reserves based on both of your mortgages.

Credit score

Having excellent credit also makes getting approved to buy a second home easier. Second home mortgage requirements often require a higher credit score to qualify for the best interest rates. Many borrowers with lower credit scores can qualify for a primary mortgage, but mortgage requirements for a second home demand higher credit scores. Typically, you must have at least a 620 FICO in order to get approved.

Debt to income ratio

Your debt-to-income (DTI) ratio is the relationship between your monthly debt payments and income. This includes payments on term loans, like a primary mortgage, car loan, and student loans, plus revolving debt payments on credit cards, a home equity line of credit, and other credit lines.

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The DTI mortgage requirements for a second home vary by lender, but your total debt load should be less than 36% to 50% of your gross monthly income. These limits ensure that you have enough money to pay taxes, monthly household expenses, and cover any unexpected bills that may occur.

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For borrowers making $10,000 per month, the combined total of your primary mortgage, second home mortgage, other loans, and revolving debt should not be more than $3,600 to $5,000 per month.

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If your DTI ratio is too high, consider paying off your revolving debt or loans that are close to maturing. Keeping your credit cards at a zero balance and switching to a cash budget can also reduce your DTI ratio to qualify for your second home mortgage.

Income

There are no specific second home mortgage requirements for the minimum income to buy a second home. However, you must make enough money to qualify based on your debt-to-income ratio. Having a higher income and lower monthly expenses improves your ability to get approved for a new home loan.

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If your income is too low to buy a second home, consider making a larger down payment, choosing a longer repayment term, or using a home equity investment that doesn't require monthly payments. Alternatively, ask your real estate agent to show second homes at a lower price point.

How to buy a second home

If you're dreaming of owning a vacation home or second property, let's look at some of the financing options that are available.

Savings

Saving to buy a second home is an excellent choice, especially if you're close to retiring. Having a larger down payment or being able to pay cash can reduce or eliminate your monthly payments in retirement.

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Your savings provide a larger down payment and help cover the closing costs. In a competitive bidding scenario, being able to pay cash or having a larger down payment can make your offer more attractive than other bidders.

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If you're getting a mortgage and have extra money, buying down your interest rate can lower your monthly payment.

HELOC or home equity loan on your primary residence

Using the equity in your primary residence to buy a second home is often easier than getting approved for a second mortgage. This is especially true if you have an existing HELOC that you can tap into for the money.

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A home equity line of credit (HELOC) is a flexible loan that allows homeowners to borrow up to a set amount. You're only charged interest on the money you use, and monthly payments are typically interest-only. The downside is that interest rates are variable, which can increase your monthly payments as rates go up.

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If you want a fixed rate and a set monthly payment, a home equity loan is a solid choice. You'll get a lump sum of cash to buy the second home, then make monthly payments like a traditional mortgage. Unfortunately, home equity loan interest rates are often higher than what you may qualify for on your primary residence or vacation home.

HEI on your primary residence

Homeowners who want to tap into their equity without increasing their monthly bills should consider getting a home equity investment (HEI). This financing option provides a lump sum of cash that you can use to buy your second home, make improvements, and even decorate it.

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You don't need perfect credit to get approved, and there are no monthly payments or income requirements. This makes an HEI the perfect choice for people entering retirement. It's also a good option for borrowers who don't want to be burdened with extra mortgage payments.

Refinance your primary residence

Homeowners can also choose to do a cash-out refinance on their primary residence. This allows them to have only one mortgage payment while stretching out repayment of their current mortgage balance. Cash-out refinances often have higher closing costs than the three strategies mentioned above. Factor in those extra costs when comparing your options.

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Many homeowners are sitting on primary mortgages with rates under 4%. If you do a cash-out refinance, you'll lose that low interest rate. It will be replaced with a higher interest rate – currently in the 6% to 8% range. This can dramatically increase your monthly mortgage payment and stretch your budget.

Frequently asked questions

What’s the difference between a second home vs. investment property?

A second home is a property you buy to live in for part of the year (at least 14 days). Investment properties are bought to generate income by having renters throughout the year. While you can rent out a second home, it must be rented for 180 days or less. Otherwise, it risks being reclassified as an investment property.

Is it harder to get a loan for a second home?

Yes, getting a mortgage for a second home is more difficult than for your primary residence. Mortgage requirements for a second home typically include larger down payments and higher cash reserves. Additionally, you must meet the lender's debt-to-income ratio, which includes payments on both properties.

How do I know if I qualify for a second mortgage?

The qualifications for a second mortgage vary from one lender to the next. Generally, you should have a debt-to-income ratio under 50% and a down payment of at least 10%. Many lenders also require cash reserves to cover both mortgages for several months. Speak with your current lender about loan options, then compare those with at least three other lenders or mortgage brokers.

Can I buy a second home without a mortgage loan?

Yes, you can buy a second home without getting a new mortgage. Some homeowners use their savings or investments to buy the property, while others tap into their home equity. Financing options that don't require a new mortgage include a home equity loan, HELOC, or home equity investment.

Final thoughts

If you're dreaming of owning a vacation property, there are many ways to buy a second home. Second home mortgage requirements vary by lender, but the process typically follows the same path as buying your primary residence. You'll need a larger down payment, and it may be harder to qualify based on both mortgages impacting your debt-to-income ratio. For this reason, many homeowners purchase a second home using cash or their current home equity through a HELOC, home equity loan, or home equity investment.

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