How to get a second home mortgage or vacation home loan

Gina Pogol
The Mortgage Reports contributor

Buying a second home might be your smartest move

Hotels are great, but they’re certainly not a good investment for visitors.

Second homes, on the other hand, can potentially yield a return while providing a vacation spot over which you have 100 percent control.

If you’re tired of spending your holidays in hotels and vacation rentals, consider joining thousands of Americans who buy second homes each year.

Low mortgage rates make vacation home financing more affordable than ever. But buying a second home is not like purchasing a primary residence.

Here’s what you need to know before jumping in.

Verify your second home options (Dec 5th, 2021)

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What to know about second home mortgages

It’s common to get a mortgage for a second home. Over half of all second home buyers use a mortgage rather than paying cash.

But financing a second home or vacation home comes with different rules than a primary residence. Before applying for a vacation home loan, you should know that: 

  • When buying a vacation property, you’ll likely need at least two months of reserves
  • Credit score requirements for a second home are higher than for a first home
  • Second home loan options come with lower rates than rental or investment property loans, but higher rates than primary residences
  • You may be able to defray your monthly mortgage expenses by renting out your vacation home when you’re not using it. It might still qualify as a ‘vacation’ residence
  • You must plan to occupy the property at least part of the year

There are three main ways to finance a second home or vacation property.

You could cover all or part of the purchase using the equity in your primary home. This is possible via a cash-out refinance or a home equity line of credit (HELOC) on your current home.

Or, you could finance the purchase by taking out a conventional loan on the second home itself. This process would be much like taking out a loan on your primary home, but with slightly tougher requirements.

Check your second home mortgage eligibility (Dec 5th, 2021)

Second home mortgage requirements

Second home mortgage requirements are a bit stricter than first home loans.

Fannie Mae and Freddie Mac — the two agencies that set conforming loan guidelines — set requirements for both the borrower and the home being purchased. 

Second home mortgage borrower requirements

The most important requirement is that you need at least a 10% down payment. This rule is non-negotiable.

But beyond the down payment rule, guidelines for second home mortgages can be flexible. Borrowers may be approved with:

  • A credit score of 680 or higher (typical)
  • A credit score of 640-679 (with a down payment of 25% or more)
  • A debt-to-income ratio up to 45%

If one area of your application is weaker, you can often compensate for it by being strong in other areas.

For instance, if your credit score is right at 640, you may get approved by making a bigger down payment. Or, if you have a high debt-to-income ratio, you can make up for it with an excellent credit score and 12 months’ cash reserves.

Thanks to this flexibility, it’s possible to qualify for a second home mortgage even without perfect credit or a huge down payment.

Second home mortgage property requirements

In addition, the property itself needs to meet certain guidelines. It must be:

  • Occupied by the owner some portion of the year
  • A one-unit home (not a duplex, triplex, or four-plex)
  • Suitable for year-round use
  • Belonging solely to the buyer
  • Not rented full-time, and is not under a timeshare arrangement
  • Not operated by a management company that has control over occupancy

That first rule, stating you must occupy the home part time, is the most important.

It means you’re not allowed to finance a property using a second home mortgage and rent it out full time. You yourself need to stay there for part of the year.

If you plan to rent the home full time, it’s considered an investment property — not a second home — and will be subject to higher interest rates and different loan requirements. 

In addition, the home must be a reasonable distance away from the buyer’s primary residence. It also helps if the house is in a resort community or area.

In short, the property must “feel” like a recreational residence, not a rental property posing as one.

Down payment for a second home

You can buy a first home with just 3% down in many cases. But it takes at least 10% down to buy a vacation home — and that’s if the rest of your application is very strong (high credit score, low debts, and so on). 

If you have a lower credit score or higher debt-to-income ratio, your mortgage lender may require at least 20% down for a second home. A down payment of 25% or higher can make it easier to qualify for a conventional loan.

If you don’t have a lot of cash on hand, you may be able to borrow your down payment.

The National Association of REALTORS® says about a fifth of buyers tap into equity from their primary residence to make the down payment on the second home. This is possible using a cash-out refinance or a home equity line of credit.

When rates are low, a cash-out refinance could have the double benefit of covering your second home down payment and lowering the interest rate on your primary home loan.

What about FHA or VA loans?

The U.S. government doesn’t sponsor loans for anything but primary residences, since those loans are meant to encourage primary homeownership. However, if your seller has a government-backed loan against the property, you may be able to assume the seller’s loan.

Your loan of choice will probably be a conventional (non-government) loan, such as those underwritten by standards set out by Fannie Mae and Freddie Mac.

Assets needed for a vacation home purchase

When you buy a vacation property, you’ll probably need reserves. Reserves are funds available to pay your mortgage if you experience an interruption in income.

One month of reserves is equal to the amount of money it would take to make one monthly payment on both your primary residence and future second home.

You’ll need at least two months of reserves if you’re a well-qualified wage earner, and at least six months if you’re self-employed or have any weaknesses in your file.

If you have at least 12 months’ cash reserves, you may be able to get away with a slightly lower credit score or higher debt-to-income ratio on your second home mortgage application.

Credit score to buy a second home

Credit score requirements are slightly higher for second homes than for primary residences.

For example, Fannie Mae sets its minimum FICO at 620 for primary home purchase loans. But a second home loan backed by Fannie Mae requires a minimum credit score of 640 — and that’s with a 25% down payment and DTI below 36%.

If you make a down payment of less than 25%, you typically need a credit score of at least 680 and low debts, or 720 with a higher debt-to-income ratio.

Credit score requirements can also vary by lender. If you’re having trouble qualifying for a vacation home loan when you first apply, try shopping around for a lender with more lenient requirements. 

Income required for a second home

Debt-to-income requirements depend on the size of your down payment and your credit score. Fannie Mae allows a DTI up to 45% with a 660 FICO and at least 25% down.

A 45% DTI simply means your total monthly payments add up to 45% of your gross income.

For example, if you make $10,000 per month before taxes, your total monthly debt payments could be a maximum of $4,500. That includes your primary mortgage payments, second mortgage payments, auto loans, and other ongoing debts.

Unlike investment properties, vacation homes have no rental income to offset the mortgage payment. You have to qualify with income from sources other than the property you are purchasing.

If you’re buying a multi-unit vacation home, most lenders will treat your purchase as an investment property, whether or not you plan to rent it out.

Second home mortgage rates

Second home loans have only slightly higher interest rates than first home mortgage loans.

As with your main home, it pays to shop aggressively for your best mortgage rate.

Compare offers from at least 3-5 different mortgage lenders, and remember to look at their fees and annual percentage rate (APR) as well as the quoted mortgage rates. 

To make sure you qualify in the first place, take a look at your assets, credit, and income — like an underwriter will.

You’ll have the best chance at a low second home mortgage rate if you pay down outstanding debts and get your credit score as high as possible ahead of time. A bigger down payment of 25% or more can help you get a lower rate, too.

Check today's second home mortgage rates (Dec 5th, 2021)

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Other expenses to plan for

Owning a second home comes with extra responsibility. You’ll be maintaining two households, and that could cost more than you expect. So plan carefully.

Remember, affording a home is not the same as qualifying for a mortgage loan.

Mortgage underwriters only look at expenses for principal, interest, property taxes, insurance, and, if applicable, HOA dues. If these expenditures check out, they approve your loan.

You must consider travel costs, regular maintenance, repairs, utilities, furnishings, and household items. If the second home is far away, will you need to pay someone to maintain it for you?

You might be able to offset some or even all of these costs if you rent your home part-time. But second home mortgages require you to occupy the home at least part of the year.

You should be clear on the amount of time you’re actually allowed to rent out the property — if at all — before banking on rental income to cover your homeownership costs.  

Is a rental the same as a vacation home?

Rental homes and vacation properties are financed differently.

If you can qualify for your purchase without the property generating any income, buy it as a vacation home. You’ll get a better mortgage interest rate, and qualifying is more straightforward when rental income is off the table.

However, if you need to rent out your place to afford it, your purchase becomes an investment property rather than a second home.

In this case, your mortgage lender will want to see an appraisal with a comparable rental schedule. This document tells the underwriter the property’s potential income.

The lender counts 75% of the anticipated rent as income to you, and the monthly mortgage, taxes, and insurance are added to your expenses when calculating your debt-to-income ratio (DTI).

Investment property mortgages often require at least 20% down, because it’s very difficult to get mortgage insurance for these purchases. Investment property mortgage rates can be 50 basis points (0.5%) or higher than rates for primary residences.

Can I use rental income to pay for my second home mortgage?

Owning a second home may not be as expensive as it first appears. The reason: potential rental income.

Some homeowners defray their monthly mortgage expense by renting out their vacation home when they’re not using it.

The rise of Airbnb and similar services makes it easier for vacation home buyers to receive occasional rental income.

This practice is allowed by most lenders. Fannie Mae, the agency that creates rules for the majority of the nation’s mortgage loans, updated its stance on this issue.

While rental income can’t be used to qualify for the loan, Fannie Mae now says lenders can consider a property a “second home” instead of an “investment property” even if rental income is detected.

Rental income cannot be used to qualify for a second home mortgage. But you can use rental income toward your mortgage payments once you own the home.

This is important. The rule may not come into play when you buy, but it most certainly will if you want to refinance in the future.

Second home mortgage rates are lower than those for rental and investment properties. And down payment requirements for second homes are more lenient.

Make sure the property meets all second home requirements to avoid paying higher interest rates now and on a refinance later.

Also note that, even though rental income won’t affect loan eligibility, the income has tax implications.

If you have tenants in your vacation home for more than 15 days out of the year, you’ll have to report the rent as income to the IRS.

But you may also qualify for tax savings such as the mortgage interest deduction and deductions for your expenses maintaining the home. 

Three ways to finance a second home purchase

If you’re thinking about buying a second home this year, there are a few different ways you can fund the purchase.

You may not even have to take a loan out on the second home.

These are the most popular methods of making a down payment — or paying cash — for a second home.

1. Use a cash-out refinance on your primary home

Home values are rising across the country, with sales prices hitting record highs in some areas.

Many homeowners have built substantial equity in their primary or rental residence in just the past few years. They can tap into this equity via a cash-out refinance.

For example, say a homeowner owes $100,000 on their mortgage, but their home is now valued at $200,000 due to appreciation. They could withdraw some of the equity by refinancing into a bigger loan and taking the difference in cash.

In this case, the borrower would have access to a substantial down payment on a second home:

  • New loan amount: $160,000
  • Current mortgage: $100,000
  • Closing costs: $3,000
  • Available cash: $57,000

Borrowers who have good credit could borrow up to 80% of their home’s current value with a conforming loan. Other loan types allow an even higher percentage.

For example, veterans may have access to 100 percent of their equity if they use a VA cash-out loan.

Today’s low mortgage rates may allow borrowers to drop their rate while taking a cash-out refinance. Some homeowners could even come out with a similar payment on a bigger loan amount thanks to a lower interest rate.

Cash-out refinancing can be a good way to liquidate your home equity and use it to afford that vacation home you’ve had your eye on.

But before you take this step, be sure you can afford the larger monthly payment on your first home.

Also consider the financial obligations associated with second home ownership, including property taxes, insurance premiums and deductibles, and ongoing maintenance costs.

For many, taking out a bigger loan on real estate they already own is the most economical way to buy a second home.

Verify your options on a second home (Dec 5th, 2021)

2. Open a HELOC on your current home

According to NAR’s annual vacation home buyer survey, a home equity line of credit (HELOC) on a primary residence is a favorite funding source for second home buyers.

If you have enough equity in your home right now, then you could simply take out a line of credit and buy your second home outright or use the funds to make a down payment.

This option would eliminate the need to refinance your current mortgage. You would keep your first mortgage intact and add another loan with different terms.

You might want a HELOC if you have recently refinanced into a very low rate. Opening a line of credit does not affect your first mortgage.

You might want a HELOC if you have recently refinanced into a very low rate on your first mortgage.

Typically, applicants need good to excellent credit for a HELOC. But these second mortgages come with some interesting perks.

Once approved, cash generated from the loan is yours to use as you wish. You can use the credit available, pay it back, and then tap it again throughout your HELOC’s loan term.

Plus, you may be able to circumvent the higher closing costs you’d have to pay by taking out a new primary mortgage.

You usually have the choice of a HELOC which has a variable rate, or a home equity loan that has a fixed rate.

The fixed option comes with a slightly higher rate but has better payment stability built-in, making it a good choice for some second home buyers.

3. Get a loan on the second home itself

As discussed above, another option is to get a loan via conventional financing.

Current rules allow for down payments as low as 10%, and credit eligibility guidelines can be lenient depending on the lender.

Don’t think you can qualify to buy a second home? You might be surprised.

What are today’s second home mortgage rates?

Mortgage rates are ultra-low across the board, so vacation home loans are cheap right now as well.

To make home buying even more affordable, shop around for rates by calling at least three mortgage lenders. Most, if not all, lenders who offer primary residence loans also offer second home mortgages.

Make sure your loan officer knows you’d like to finance your purchase as a vacation home and not an investment property.

Get a quote for your vacation home purchase and be sure to shop around to get your best rate.

Verify your new rate (Dec 5th, 2021)