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THE INS AND OUTS OF FINANCING A 2ND HOME

DEANA M. DEVEREAUX • May 23, 2022

Real estate investing has always been popular, but what does it take to buy a second home? Buying a second home is different than buying a main home because, when buying your primary residence, you qualify for a variety of discounts and grants. 


Information about financing your second home is varied and can be confusing. Lack of information is the number one barrier to action. If you are seriously considering purchasing a second home to use as an investment property, Airbnb, or vacation home you will want to read this article! We’ve put together a helpful guide on everything you need to qualify for your second mortgage.  

Step 1 – Decide How You’re Going to Use the Second Home


Your down payment requirements and loan types will differ depending on what you plan to use your second property for. For example, do you plan to use it as a vacation home, secondary residence, or full-time rental property? 


A vacation home or secondary residence may qualify for a conventional home loan. When qualifying for a second conventional loan, the process is much like your first mortgage except you will be required to put down 10 percent. 


If you are purchasing the home to use as an investment property or full-time rental, you won’t qualify for certain loan types such as FHA or VA loans. You will also be required to put down a larger down payment than a vacation home or secondary residence. In addition, you may have to meet stricter debt to income ration requirements. 


All hope is not lost though! You can still qualify for a vacation home or secondary residence if you plan to rent the home out on apps like Airbnb. Typically, you must occupy the home for some portion of the year, and the home must be a one-unit home that can be used year-round.


We can help you figure out what loan type you qualify for. 


Step 2 – Save For Your Down Payment


There are multiple ways to complete this step. You can save the traditional way and put away a portion of your paycheck every month. You can also use the equity in your primary home to fund the down payment of your second home. There are multiple programs available such as: 

·      Cash out refinance: A cash out refinance allows borrowers to borrow up to 80% of their home’s current value. The only caveat with this option is that your primary home’s monthly payment will increase.


·      HELOC: A HELOC, otherwise known as a Home Equity Line of Credit. This avenue differs from a cash out refinance because you are not refinancing your primary home’s mortgage. This is a good option if current interest rates are higher than your primary home mortgage interest rate. The last thing you want to do is refinance to a higher interest rate! 

Step 3 – Work on Your DTI and Credit Score

 

As we’ve discussed previously in this article, you will need to meet stricter standards to qualify for a second mortgage. Your credit score will likely need to be around 725 and your DTI below 36 percent. 


If you are don’t currently meet these requirements, you can work to make your consumer loan payments on time and eliminate as much revolving debt as possible. 


Step 4 – Get A Pre-approval


Once you’ve decided how you’re going to use your second home and how you’re going to finance it, it’s time to get a preapproval. You’ll want a pre-approval before even looking at homes to ensure you’re able to put in an offer when the second home of your dreams pops up on the market. 


This pre-approval will be much like your primary residence pre-approval. Make sure to get all your financial documents in order and work closely with us to fill in any gaps in your financial or work history.


Remember: be honest, don’t try to use a primary mortgage for a second home. It will be found out, and it is illegal! We are here to help you through the process as seamlessly as possible. Being honest, upfront, about wanting to qualify for a second home will only help you move through the process quicker.


 Contact us today to get started!


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