How to finance a second home: Strategies and challenges to consider
Quick insights
- There are several ways to finance a second home, including conventional loans, cash-out refinancing, home equity loans and shared ownership.
- Each option comes with a unique set of benefits, considerations and requirements, which can vary depending on the choice, including interest rates, down payments and eligibility criteria.
- Securing a loan for a second home can be more challenging than for a primary residence. To improve your chances, focus on boosting your credit score, saving for a larger down payment, lowering your debt-to-income ratio and researching lender requirements.
Have you ever thought about owning a second home you can visit during different seasons? Whether it’s a cozy winter retreat or a favorite summer getaway, having your own place could make those trips more enjoyable and may even save money compared to renting year after year.
There are a few different ways to finance a second home or vacation property. It’s not always an easy undertaking, but it’s one worth considering. We’ll walk you through how to finance a second home in this guide.
How to finance a second home or vacation property
If you have the liquid assets available to finance a second home, this is usually the best option. However, it may not be realistic or financially prudent for everyone, so keep these things in mind:
- You may need more cash upfront than you did to get a mortgage for your primary residence.
- You must occupy the property for a certain percentage of the year.
- There’s a chance you may not be able to rent the property out.
- These loans often have higher credit score requirements.
- Second home loans often come with lower interest rates than investment properties but are still higher than primary residences.
- If you are using this purchase as an investment, remember that it is a long-term strategy and it could take time for the initial purchase to pay off.
Loan, refinance and other financing options
If you’re trying to figure out how to buy a second house, here are some options you may want to consider.
1. Conventional loan
Just as you may have done with your primary residence, you may be able to take out a conventional loan for your second home, too.
A conventional loan involves monthly payments toward your principal and interest. Your monthly payments will depend on the price of the house you’re purchasing, your down payment amount and your personal qualifications like debt-to-income ratio and credit score.
2. Cash-out refinance
If you’ve owned your primary residence for a while, you may have a decent amount of home equity. A cash-out refinance replaces your current mortgage and borrows against the equity in your home. You can use the extra money as cash toward other life expenses, like a down payment on your second home.
3. Home equity loan
A home equity loan allows you to borrow against your home equity as well, but instead of replacing your mortgage, this loan acts as a second one. You’ll be making separate payments toward your home equity loan. Since it is a second mortgage, it usually comes with higher interest rates. Keep in mind, Chase does not offer home equity loans in any state at this time.
4. Shared ownership
Another possibility for financing a second home or a vacation home is going in with other family and friends. This can make it more affordable and even more fun!
5.Jumbo loan
Provided you meet the lender’s requirements, you may also be able to use a jumbo loan to finance your second home. Jumbo loans are designed for properties that exceed the conforming loan limits (CLLs) set by the Federal Housing Finance Agency (FHFA). The FHFA establishes CLLs annually, dictating the exact dollar threshold above which a mortgage is classified as jumbo.
Because jumbo loans involve higher loan amounts, lenders often have stricter criteria, such as higher credit scores, larger down payments and lower debt-to-income ratios.
How much income do I need to buy a second house?
There’s no set standard for how much income you need to purchase a second home. The cost of the property will determine how much income you need.
Remember, though, that lenders tend to require a higher down payment for a second home. By purchasing a second home, you’ll also be doubling your expenses, including property taxes, maintenance, etc. So, you will want to have a clear, detailed budget laid out before you make the final decision.
Other requirements for financing a second home
As you’re researching how to finance a second home, one of the most important things to consider is what will be required of you in your application. Each lender will vary in their terms and requirements, but in general, the following is expected.
Down payment
When financing a second home, lenders typically require a larger down payment compared to a primary residence. Most lenders expect at least 10% to 20% of the purchase price as a down payment. A larger down payment can also help you secure better interest rates.
Credit score
A strong credit score is essential for qualifying for a second home mortgage. Lenders generally look for a credit score of 680 or higher, though some may require a score of 700 or above for more favorable terms.
Debt-to-income ratio
Your debt-to-income ratio (DTI) plays a significant role in determining your eligibility. Lenders usually prefer a DTI ratio below 43% to make sure you have sufficient income to manage both your primary and second home expenses.
Cash reserves
Lenders often require proof of cash reserves to cover several months of mortgage payments for both your primary and second home. This demonstrates financial stability and reduces the lender’s risk.
Property requirements
In addition to standards you must meet as the borrower, the property will generally need to tick off a few boxes to qualify for financing. These include:
- Occupied by the owner: You must live in the property part of the year as a secondary residence, and you must be the sole owner (timeshares aren’t eligible).
- Single-unit: The property must be a single-family home, condo, or townhouse.
- Habitable year-round: The home must be suitable for year-round living.
- Limited rentals: Occasional rentals are allowed, but full-time renting is prohibited.
- No professional management: The property cannot be managed by a company dictating its use. Otherwise, it may be deemed an investment property which could impact financing and come with additional tax implications.
Is it hard to get a loan for a second home?
Getting a loan for a second home can be more challenging than securing financing for a primary residence, but it’s achievable if you meet the requirements.
It’s important to have an open, honest conversation with your lender as you go about the process. Lenders will want to confirm that the property is truly a second home and not an investment property.
Some tips as you’re figuring out how to finance a second home include:
- Boost your credit score: Pay down debts and avoid opening new credit accounts before applying.
- Save for a larger down payment: The more you can put down, the less risky you appear to lenders.
- Lower your DTI ratio: Pay off existing debts to improve your financial profile.
- Shop around: Different lenders have different requirements, so compare options to find the best fit.
In summary
With the right preparation and tools, financing a second home could be a reality for you. Whether it’s refinancing your primary residence, taking out a second loan or going in with a family member, there are many avenues to explore. Speak with your Home Lending Advisor today to learn more.
