Are you considering buying a second home? Having another property can be a wise investment for your future, as it can provide additional income and a relaxing escape from daily life.

However, knowing the costs involved in purchasing and maintaining a second home is essential, which can accumulate quickly and vary based on how you plan to use the property. Your financing options for a second home will also depend on your plans for the property. Here's how to ensure you're fully prepared.

 

Uses For A Second Home

There are several common reasons why people invest in a second home. Some buyers clearly know what they want to do with their property before purchasing, while others may need more time to decide.

The following are some of the most popular ways to use a second home: 

 

• as a vacation home for regular getaways or future retirement;
• as a commuter home if you or your partner work far from your primary residence;
• as a rental property for real estate investment purposes;
• as a new home to move into while keeping your current property as a rental; and
• as a home for a family member.

 

It's important to have a clear idea of what you plan to do with your second property, as this will impact your financing options, ongoing costs, and the type and location of the home you purchase.

 

Can You Afford A Second Home?

Before taking the plunge and investing in a second home, it's essential to determine whether you can genuinely afford it. Even if you plan to rent out the property, you'll want to make sure it's a purchase you can afford, especially if the property will remain unoccupied for several months a year.

Here are some financial factors to consider before buying a second home:

 

Down Payment And Interest Rates

Like any other home purchase, buying an additional property will require a down payment and a mortgage with interest unless you plan to pay in cash. However, a higher down payment is typically required for a second home due to the higher risk involved for mortgage lenders.

A second home mortgage usually carries a higher interest rate as a precaution against possible losses in the case of a mortgage default. Your lender will consider various factors, including your credit score and history, the existing conditions in the housing market, as well as your debt-to-income ratio (DTI) in order to determine the terms of your loan.

 

Debt-To-Income Ratio Requirements

To qualify for a mortgage on a second home, you'll need to meet specific debt-to-income ratio requirements. This refers to the amount of debt you have compared to the amount of money you make. You can calculate your DTI by adding up the monthly debts you pay and dividing it by your monthly pre-tax salary.

To be eligible for a second mortgage, most lenders will expect your DTI to be no higher than 43%.

 

Monthly Budget

Even if you're approved for a second mortgage, you'll want to carefully consider whether adding an additional mortgage payment to your monthly bills makes sense financially. You can simply subtract your total monthly expenses from your monthly income. You should also consider property taxes, homeowners association fees, and general upkeep costs before deciding to take out a second home mortgage.

 

Rental Maintenance

If you plan to rent out your second property, be prepared for the costs of maintenance and repairs. As both the owner and landlord, you'll be responsible for handling any necessary repairs and damages. A property manager can be a valuable resource, but keep in mind that their services may come at a cost.

 

Vacancy

If you're planning to rent out your second home, make sure you can cover costs if the property remains vacant for an extended period or has an unexpected dry spell in renters.

 

Travel

If your second home is located far from your primary residence, don't forget to budget for travel costs between the two properties.

 

How To Buy A Second Home

If you're ready to start looking for your second home, the process will be similar to when you purchased your current home.

Choose A Location For Your Second Home

First, you'll need to decide where you want to buy your second property. This is a major decision, so make sure to discuss potential locations with your spouse and any other family members who may be involved in the decision. From there, you can move on to the next steps in the process.

 

Determine The Best Financing Option For Your Home Purchase

When financing a second home, the most suitable mortgage for you will depend on how you intend to use the property. Lenders often offer varying rates and qualification requirements for second homes as opposed to investment properties.

Nonconforming or portfolio loans, such as jumbo loans, are usually considered for second homes rather than investment properties. However, if you rent out the house for no more than 14 days a year, most lenders will still classify it as a second home.

Conversely, with conventional loans, you can rent out your second home for up to six months annually without it being classified as an investment property, as long as you didn't use the home's future rental income to qualify for the loan. However, the IRS might still consider it an investment property because of its own set of guidelines.

 

Second homes are generally not eligible for government loans, regardless of how you plan to use them. Only primary residences are qualified for mortgages supported by the Department of Veterans Affairs. The Federal Housing Administration, on the other hand, makes a few exceptions for commuter homes.

 

Qualify for a second-home mortgage

To get approved for a mortgage on a second home, you may need to meet stricter requirements than for your primary residence. Lenders often view second homes as riskier investments, so they may require a higher minimum credit score and a lower maximum debt-to-income ratio.

 

To secure a better interest rate, you'll likely need to make a larger down payment upfront, ranging from 10% to over 20%, depending on the loan type.

 

It's important to shop around and compare offers from different lenders to ensure you're getting the best possible deal, even if you're confident in your eligibility for a second-home mortgage.

 

Team Up With A Local Real Estate Agent

Teaming up with a local real estate agent is crucial in the process of buying a second home. Your agent will assist you in finding the perfect home and negotiate on your behalf while guiding you through the rest of the buying journey.

 

It's important to choose an agent who is familiar with the area where you plan to purchase, as they will have a better understanding of the local real estate market and can provide valuable advice on finances and neighborhoods to explore.

 

Find Your Dream Second Home

Looking for a second home that meets your specific needs and budget can be a daunting task. Fortunately, with the help of a knowledgeable agent, you can find your dream home with ease. Your agent will guide you through the preapproval process for a mortgage and assist you in narrowing down your search to homes that match your criteria, such as the number of bedrooms, bathrooms, square footage, location, and amenities.

 

Once you have found a home that meets your needs, your agent will help you make an offer and negotiate with the selling agent. If your offer is accepted, the next step in the process will begin.

 

Purchase Your Second Home

When your offer is accepted, you'll start the closing process, which usually takes around 30 to 40 days and involves several steps:

• Choose a trusted real estate attorney or closing agent who can help you with the necessary paperwork;
• Buy homeowners insurance. Make sure to get policies that cover any potential damage;
• Purchase title insurance, which will protect your purchase;
• Schedule a home inspection, which will give you a better idea of the property's condition;
• Wait for the appraisal results and negotiate with the seller if necessary;
• Arrange a final walkthrough to make sure everything is in order; and
• Finally, pay the closing costs, sign the paperwork, and get the keys to your new home. Your agent, attorney, or closing agent will guide you through the process to ensure everything is in order.