How To Buy A Second Home

If you’re deciding whether to buy a second home, you’ll want to consider the full financial impact, including income potential if you plan to rent it out. Here are some key factors to think about before you buy a second home, and how to make it happen.

How to buy a second home

Buying a second home is a lot like buying your first property. If you’re not purchasing with cash, you’ll need to get preapproved for a loan and work with a real estate agent with experience in the area where you’re buying.

The upside: Given that you’re likely buying this home as an investment or vacation home, you might be under less time pressure than you were when buying a home you planned to move to immediately. Use that to your advantage to be choosy and find the perfect home.

1. Decide how you’ll use the second home

People buy second homes for various reasons. Before buying one, get clear on how you plan to use it. If you want to use the property as a vacation home for part of the year but rent it at other times, for example, you might need to meet different criteria to qualify for a mortgage (if you aren’t paying in all cash).

Some common ways that people use a second home include:

• Investment property: Buying another property can be a way to make money. You could buy a home to flip and sell for a profit or use it as a short- or long-term rental property.
• Vacation home: If there’s a place you go on vacation frequently, like a certain beach or a cozy mountain town, you may want to purchase a vacation home in that location.
• Second residence: If you split your time between two locations, having a property in each place could be a good idea.
• Combo: You may want to have a vacation home, but rent it out when you’re not there. Or maybe you want a similar setup with a secondary residence.

Learn more: Things to know before you buy a second home

2. Figure out your financing

Once you settle on how you’ll use your property, you need to figure out how to fund it. If you don’t plan to pay for the home in cash, you’ll likely need to get another mortgage.

Second home mortgage requirements can be more strict than mortgage requirements for your first home:

• Many lenders require you to put at least 10 percent down on a second home.
• You’ll need to have enough income to cover both your primary residence and the second home.
• You’ll need a separate homeowners insurance policy, potentially with add-ons like flood insurance.
• You’ll also pay for expenses like furniture and decor, utilities, security and landscaping.
• If you plan to rent the home, will you want to handle landlord duties yourself? If not, you’ll need to hire a property manager, as well.
• Property taxes are your responsibility, too.

There are tax implications, as well. It’s worth talking to a financial advisor or tax professional to understand what you’re taking on. You’ll also need to get a sense of how much your second home will cost long-term.

3. Get preapproved for a mortgage

When you’re ready to start looking for second homes, get a mortgage preapproval. This demonstrates to sellers that a lender is willing to offer you financing up to a certain amount. You won’t be able to make offers on homes without a preapproval.

Depending on the lender you work with, you can get preapproved online or in person with a loan officer. The process involves providing documents about your finances, as well as a credit check. If you’re deemed eligible for a mortgage, you’ll receive a preapproval letter.

Learn more: Compare current mortgage rates

4. Find a real estate agent

This is key: Find a real estate agent who’s plugged into your desired location. Agents can help in a variety of ways, including:

• Filling you in on price trends and how comparable sales have fared, as well as resale prospects.
• Knowing how long homes have been on the market.
• Pointing out homes not currently on the market that might become available.
• Explaining why one side of the street could be worth 5 percent more than the other.

When you’re interviewing potential agents, ask questions about how long the agent has lived and worked in the area and how involved they are in the community.

5. Go house-hunting

It’s time to tour properties to see what fits your needs best. Based on the goals you established, think about what you want in a second home. For instance, do you want:

• Extra bedrooms for guests?
• Proximity to recreation, restaurants, shopping or transportation?
• A mountain or lakeside view?

Your agent can help you narrow down your wish list and set realistic expectations for the house hunt. If you’ve never been to the area before, it might be worth renting for a short time, or at least visiting for a long weekend. This will help you learn about the different neighborhoods and local housing trends.

6. Make an offer

Once you find the perfect property, it’s time to make an offer. Based on your preapproval and overall budget, your agent can help you determine an offer price. The seller can decide to either accept, reject or counter your offer.

Learn more: How to make an offer on house

Key considerations before buying a second home

As you think about whether purchasing a second home is the right move, consider these factors:

Affordability

If you aren’t making an all-cash offer on your second home, you’re going to have a second mortgage. Look closely at your budget to determine if that extra monthly cost makes sense for your finances.

You’ll also need to budget for:

• Insurance: Getting second home insurance can be more challenging and complex than for a primary residence. If you’re considering a vacation home on the beach, for instance, you’ll need flood insurance. If you plan to rent your property out, you’ll need landlord insurance.
• Utilities: If you don’t plan to use the house much or intend to have your tenants cover utilities, these won’t be as high. Don’t forget about utilities while you’re away, too.
• Maintenance: Second homes need maintenance and repair just like any other property. Even if you plan to rent the place out, the fixes are your responsibility as the landlord.
• Property taxes: These can vary significantly by location, and often rise over time.
• Travel: Consider the cost of getting to and from the home.

Occupancy requirements

Depending on how often you rent out your second home, it could be considered an investment property and subject to different tax and occupancy rules. If your mortgage is backed by Fannie Mae or Freddie Mac, for example, that limits your leasing. The property must be “available primarily for borrower’s personal use and enjoyment” for more than half the year.

The IRS has rules, too. You’ll need to report the rental income if you rent your second home out for more than 14 days a year. If you sell the home at a profit, you might be liable for capital gains tax.

Location

Buying a second home in a beach resort community sounds like a great idea. But if you live really far from that town, getting there might be so much of a hassle that you don’t go that much. Think about your lifestyle and find a second home in a destination where you’ll really use it regularly.

If you plan to rent out the house, this is just as important. You might need to be on-site to vet tenants, evaluate repairs and more. You don’t want to have a rental property that’s a headache to manage.

Next steps to buying a second home

FAQs

• Can I use an FHA loan to finance a second house?
  

  Federal Housing Administration (FHA) loans are designed for primary residences, so most borrowers won’t be eligible to buy second homes using this program. However, it’s unlikely that most second-home borrowers would even benefit from FHA financing. FHA loans are geared toward buyers with less-than-perfect credit scores, and therefore carry higher fees for mortgage insurance. If you’ve already got a primary mortgage, your payments should have boosted your credit score well into the 700s.

• Do I need 20 percent down to buy a second home?
  

  Not always, but it helps. Many loan programs require at least 10 percent down to finance a second home, and some require 20 percent or more.

• Can you use your current house as a down payment for a second home?
  

  Yes, it is possible to tap your equity in your primary residence as a down payment for another house. You can do this either through a cash-out refinance or a home equity loan or line of credit. There are no rules about how you use the proceeds. But, keep in mind that any new debt you take on against your primary home could affect how much you can borrow for the second home.