How to Buy a Second Home

by on May 27, 2012Shannon O'Brien

Lots of things are better in twos: heads when making decisions, aces at the blackjack table and houses. That is, if you can afford two of them.

Sometimes the good stuff comes in twos by accident.

Cheryl J. owned a lovely two-bedroom condo in Las Vegas. When she married and got pregnant (with twins!) she and Jack decided to purchase a single-family home with a yard for the kids. Because the market was depressed, they kept the condo, renting it out.

Whether you decide to purchase a second home for a vacation retreat or to make some extra income, if you can afford it, it’s a great investment.


Can You Afford to Buy a Second Home?

If you’re less-than-wealthy, you’ll need to crunch some numbers to ensure you can truly afford a second home. Remember: it’s not just the purchase price that needs to be affordable. Plan on the same ongoing expenses with this house as you have with your primary residence: taxes and insurance, for instance.

For second homes, not just the purchase price needs to be affordable.

Then, factor in the additional expenses involved with owning a home that you don’t live in full-time, such as hiring a property manager.

If you can’t charge enough in rent to cover the monthly expenses, you’ll need a cash reserve to help out. Financial managers recommend that you stash away enough money to cover a year’s worth of rental income and maintenance.


Qualifying to Buy a Second Home

What is required to qualify for a second mortgage loanOnce you’ve determined that you can truly afford a second home, if you can’t pay cash for it, you’ll need a mortgage loan.

The qualifications for a mortgage on a second home are a bit more stringent than when purchasing your first home, according to the experts at Dow Jones’ Smartmoney.com. Plus, the standards for purchasing a vacation property versus an investment property are different.

The benefits of choosing to buy a vacation home, rather than an investment property, include:

  • Guidelines for purchasing vacation homes are more lenient than those for investment properties.
  • Down payment requirements are generally more relaxed.
  • Interest rates are typically better.

Here are some of the ways getting a second mortgage loan is more difficult than securing the first:

Larger Down Payment

You will still need to come up with a larger down payment than you would were you purchasing a home you intend to live in – from 20 to 35 percent of the purchase price, depending on the lender.

Improved Credit Score

Lenders require a higher credit score for loans on second homes. Again, this varies by lender, but the general rule is that you’ll need your credit score to be in the 725 to 750 range.

Afraid that your credit score isn’t in this range? Shop around for the second loan because guidelines vary between lenders.

Better Debt-to-Income Ratio

Our friends at Bank of America point out that lenders will put the debt-to-income ratios of those looking for second mortgages under closer scrutiny than they would for borrowers on their first mortgage. You may not be accepted for a second mortgage if your debt-to-income ratio is above 36% of your monthly pre-tax income!

Is your debt-to-income ratio above 36%? Here’s how you can lower it:

  • Pay down credit card, other debts
  • Make major purchases with cash until you secure the second loan
  • Increase income (if you can’t lower your debts, this is your only option!)
Other ways you can circumvent the higher debt-to-income ratio requirement:
  • Buy a less expensive home
  • Increase down payment size to lower mortgage payments

The Second Home and Taxes

How much you pay in real estate taxes on your second home depends on whether it is an investment or vacation homeIt’s a good idea to meet with an accountant before finalizing the paperwork on the second home. The deductibility of mortgage interest on your taxes relies heavily on whether the home is viewed as a vacation retreat or a business investment.

Important question: Is your second home a vacation or investment home?

If it’s truly a second home, and not a rental, you can deduct all of the interest you pay – up to debt of $1.1 million – if the debt is secured by both of your homes.

The same holds true for property taxes. As long as the second home is treated as a home and not an investment, taxes are deductible, according to the experts at Kiplinger’s.

Renting out the home presents a different set of problems and benefits. If you rent out the second home for more than 14 days out of the year, the rental income must be reported to the Internal Revenue Service and you’ll be taxed on it. Rental expenses, however, such as management fees, are deductible.

Situations vary, so if you plan to buy a second home, be sure to seek tax advice from a professional.

{ 14 comments… read them below or add one }

Jane Precious March 24, 2014 at 7:48 am

Would like to buy a second home on RI . I want to borrow 5o.00 I don’t owe any mortgage now . How can I get a mortgage on a second home.?

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antonio March 3, 2014 at 10:49 am

To deduct a second home, does it not have to be outside a certain radial milleage in order to qualify?

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sylvia February 17, 2013 at 12:50 pm

What if I want to buy the second home, but not for me, but for my daughter? She will pay for the actual mortgage, taxes and insurance. Her home was foreclosed, and she went bankrupt. She also has a family, I would like to help her out by putting up the downpayment, and have the house under my name, but she would take over the payments as I said. Would that be considered rental, even though she will be paying not me but the actual mortgage, taxes and insurance?

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Patty April 22, 2013 at 6:02 pm

Sylvia, Did you ever get an answer to your question? I have the same situation. Thanks!

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uncledodat April 29, 2013 at 7:54 pm

Well I am learning that this is a touchy subject. I to would like to hear an answer on this. I to am in the some boat. I am disabled & my father would like to help me purchase a house. The rental house that I’m in is goin up for foreclosure. After 11 months of rent free living. But I was smart about it and I saved my rent just as if I was paying rent. This was possible due to my landlord dropping off of the face of the earth. Now I have a considerable amount for a down payment. Problem is that my credit sucks (550ish) You’d figure that my dad with impecable credit(760) This would be a walk in the park. However, the red tape and flat out bull crap is simply overwhelming. It seems that if a person already owns a home. The lenders want to consider it as an investment property which requires a 20% down payment opposed to anything lower. Seems to me that if your honest with your lender they’ll try to get all they can out of you. This system sucks

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jimbo November 9, 2013 at 5:50 pm

Sylvia, it would be considered a rental, your daughter would not be able to take over the loan, she would merely be making the payments to you, the lender would not recognize her as owner.

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Patricia January 23, 2013 at 7:47 pm

Im also curious to see if we lease house number 1 and purchase house number two to live in if that changes anything or if it doesn’t matter?

Thank you.

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Barbara October 14, 2013 at 12:06 pm

I have the same issue Patricia… We own a house in Las Vegas and have it rented out currently because we had to move out of state for my husbands job and we would like to look into buying a house here in Oregon but don’t know if it changes anything since now we are buying to live not to rent.

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Millie August 9, 2012 at 12:49 am

What if the scenario is reversed? I own a home in Knightdale NC. I need to buy a larger home in order to bring my aging, ailing parents to live with us (they’re in FL). I want to live in the second home permanently as it will be large enough to house us all. I also want to buy the 2nd home in the same town I already live in. Then, I would like to rent out house #1. In reality, I’d like to sell house #1 it but, even though the market in my area has remained pretty steady, I don’t think it will sell easily – just my opinion based on the national trend…

What does this mean for us in terms of downpayment, taxes, mortgage loans etc?

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Phil November 16, 2012 at 2:45 pm

I am in the same or similar situation. I am currently living in Everett, WA. There will be 5 additional heads coming from abroad. Because I am working from home full time (telecommute) and I can work anywhere, so, I want to buy a bigger house in Vancouver, WA (about 280 miles away from where I live now).
I want to know the following:
1) what’s the minimum down payment requirement?
2) what if I can prove that I already have a renter on my current house in Everett
3) Is it possible if I can say I am moving because of job relocation?

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rental homes June 14, 2012 at 12:25 pm

There are important distinctions between second homes and holiday homes. A purpose-built holiday home may not have planning permission as a year-round residence, so before you buy, think about whether you want your weekend retreat to become a retirement option in the fullness of time.

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savannah ga June 4, 2012 at 1:14 pm

Thanks for sharing your info. I truly appreciate your efforts and I will
be waiting for your next write ups thanks once again.

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joey June 5, 2012 at 2:54 pm

Thanks for stopping by for the read Savannah. Happy to hear you’re enjoying the information.

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esterling May 30, 2012 at 10:24 am

good article – a second home can be a good investment, especially with the prices of property for sale and how hard it is to get a loan at the moment. Added to the increased amount of people renting these days, and your second property could become a nice little additional income!

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