A guide to second home down payments
Quick insights
- To buy a second home, you may need a minimum down payment higher than you’d pay for a primary residence, depending on the lender’s requirements
- The minimum down payment for a conventional loan on a second home is usually 10% down, while the minimum down payment for an investment property is 25%.
- If you don’t have the full amount, there may be options available to finance your second home down payment.
Buying a second home can be a great investment for your future as well as a place to escape for vacations with the family. If you’re thinking of buying a second home, you may be wondering about the costs involved. In particular, how much you may need to save for a down payment and how you can cover the cost of your down payment if you don’t have all the money you need available.
How much is a down payment for a second home?
Unlike a primary residence, which can be purchased with as little as 3% down, a conventional second home mortgage usually requires a higher down payment of 10% down. However, this is only the required minimum set by Fannie Mae®. Lenders may choose to require a higher down payment based on your financial situation and the type of property you’re planning to purchase.
Here are some of the questions a lender may consider when reviewing a loan application.
Are you buying a vacation home or an investment property?
One factor to consider is whether you plan to use your “second home” as a vacation property or investment property. Fannie Mae sets a minimum 15% down for a single-unit property or 25% down payment for a 2-4 unit property.
As an IRS rule, for a home to be considered a vacation home, you need to live in the property for at least 14 days each year or less than 10% of the time you rent it out to others. If you were to rent it out for more days, then it would be considered an investment property.
As mentioned above, an investment property usually requires a higher down payment. However, the upfront cost may be offset by the potential return on investment (ROI) that can come from owning a rental property.
What is your current credit score?
Lenders will consider your credit score when determining the down payment requirements for a second home. You’ll usually need a minimum credit score of at least 620, but every lender has its own criteria. The lower your score, the higher your down payment is likely to be.
What is your debt-to-income (DTI) ratio?
Lenders will also consider your debt-to-income (DTI) ratio if you choose to buy a second home. This means the debt from your second home will be added to your overall debt. Lenders usually prefer a DTI of 43% or less. If you plan to rent out an investment property, lenders may also want to see a rental income estimate.
What are your current income sources?
For conventional loans, lenders will consider your income sources, including employment and investments. For an investment property, lenders will likely need documentation to determine how much rental income you can expect to earn.
How do you finance a down payment for a second home?
Being able to put down cash on a second home purchase may be preferred by lenders. However, there are additional strategies that can be helpful if don’t have the cash.
Borrow against your existing home equity
If you currently own a home, you could borrow against your existing home equity using either a cash-out refinance, home equity loan or home equity line of credit (HELOC). Chase does not offer its HELOC in all states. Lenders usually prefer you maintain at least 20% equity in your home, but this depends on the number of units—a 2-4 unit property requires more equity, for example.
Just keep in mind you would be adding to your existing debt, which may affect your DTI.
Use an 80/10/10 or piggyback loan
Some lenders may allow you to take out a second mortgage on the home you plan to buy to cover 10% of the home’s purchase price. This can help you avoid having to pay private mortgage insurance (PMI), but it also adds to your DTI. Please note, Chase does not offer 80/10/10 loans at this time.
Find a co-buyer
It’s possible to buy a second home with someone who isn’t a spouse or family member. In this case, you and the other party would agree to purchase the home together. It may be possible to cover a larger down payment or purchase a larger property this way.
However, you’ll also need to make sure all parties understand their financial responsibilities. Otherwise, if the other party fails to pay their share of the mortgage, you could be at risk of losing your second home and your investment in the property.
Do you have to put 20% down on a vacation property?
Some lenders may allow you to buy a second home with less than 20% down. However, you may be required to purchase PMI. You’d generally have to pay the premiums until you reach 20% equity.
Can you buy a second home with an FHA or VA loan?
No, Government-backed loans like Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA) mortgages are intended to finance only the purchase of a primary residence.
You’re allowed to purchase another FHA financed home as your primary residence when you presently have an existing FHA loan under special circumstances, such as relocation, increase in family size, vacating a jointly owned home and being a non-owner occupant. Discuss with your lender what requirements must be met for those circumstances.
You’re allowed to purchase another VA financed home when you have an existing VA loan, as long as you have sufficient remaining entitlement and the new home being purchased will be your primary residence.
In summary
Buying a second home can be a great investment if you can cover the cost of the down payment. Working with a home lending expert can help you understand what your down payment expectations may be and what options may work best for you.
