What You Should Know Before Financing a Second Home — and How to Buy the Right One for Your Budget

If you’re thinking of buying a second home or vacation property, now might be the time to do it — especially given today’s historically low mortgage rates.

But exactly how should you finance that purchase? That largely depends on your intent for the property.

Are you hoping to use it as an occasional getaway for your family? Perhaps rent it out a few weeks during the year to help cover the monthly costs of the home, leaving more money in your pocket? Or maybe a little of both? You’ll need to have a clear idea of this before you make your purchase, as it will impact what loan options you’ll have when it comes time to buy.

One important fact to keep in mind as you seek a mortgage: for a property to be considered a second home (and not an investment property), it must be a single-family residence. Multi-family properties are not permitted.

Once you know which category you fall into, use the below sections to point you in the right direction financing-wise.

1. Buying a second home for personal purposes.

If you’re just buying the home to vacation, stay occasionally, live the snowbird life, etc., then you have many of the same financing options you enjoyed when purchasing your first property — except for government-backed loans.

Here’s what you may be able use to purchase the property:

  • Conventional loans – You can have up to four conventional mortgages at a time (sometimes 10, if you meet certain requirements). If you have solid credit and qualify, these can be a good option for your second home purchase.
  • Jumbo loans – If your second home goes beyond the conforming loan limits ($510,000 in most counties), then a jumbo loan may be able to help.
  • Cash-out refinance – Already paid down your first mortgage significantly? You might be able to tap that equity to finance your new home purchase — or at least fund the down payment.
  • 401(k) loans – If you have a 401(k) retirement account, there are some institutions who will let you borrow against your savings. Keep in mind, these are risky and come with fairly high interest rates.
  • Owner financing – In some cases, the owner of the property may be willing to finance the sale for you. You’d just need to pay them back, plus interest, on a monthly basis for a set amount of time. Owner financing is effectively a private mortgage, but it won’t be reported to a credit bureau.
  • Cash – Of course, you can also use cash, if you have it.

Here are the financing products you won’t be able to use:

  • FHA, VA, and USDA loans – These government-backed loans require that the property you’re buying be your primary residence. The main purpose of these loans is to assist someone in achieving homeownership, and a second home is considered to be more of a luxury. FHA only allows a second home transaction due to relocation for your job.

2. To use part-time and to rent part-time.

If you’re thinking of buying a second home to visit occasionally, but also rent the rest of the time, then you’ve got a lot of options to pick from. The one catch? You’ll need to let your lender know that you intend to rent the property out — even if it’s only some of the time. Not all lenders will allow this, and they might also have different qualifying standards for what they deem “investors.”

You can collect rent on a second home as long as you occupy the property for some portion of the year. You also can’t have a timeshare agreement and you cannot be subject to agreements that give a management firm control over the occupancy of the property (so you can use VRBO or Airbnb because you, as the owner, are determining the dates it will be available for rent vs. a company telling you when you can use it.)

Additionally, any income generated from renting the property can’t be used for loan qualification. As soon as you do that, it gets treated as an investment property.

Typically, here are the financing options you’ll be able to use:

  • Conventional loans
  • Jumbo loans
  • Home equity loans or HELOCs
  • 401(k) loans
  • Owner financing
  • Investment property loans – These are mortgages designed specifically for investment properties and can vary from lender to lender.

3. As a full investment property.

Want a 100% income-earning property? Whether that’s all Airbnb, all the time or just a long-term tenant, you’ll need to look toward either a conventional loan or an investor-focused financing method for your purchase.

These include:

  • Conventional loans
  • Jumbo loans
  • Home equity loans or HELOCs
  • Investment property loans – Our Doc Lite loans are a great option for new and experienced investors alike. You can even finance multiple properties without tax returns, W-2s, or other financial documents.
  • Hard money loans – These require a big down payment but typically have much lower qualifying standards than other loans. They’re come from private lenders and are usually only short-term.
  • Peer-to-peer (P2P) lending – P2P lending platforms can also help you finance your purchase by connecting you to cash-flush investors. Popular choices include Lending Club, Upstart, and Fundrise.

These are the financing options you can’t use:

  • VA and USDA loans
  • FHA loans (unless you plan to live in a unit)

Picking the Best Vacation Home for Your Budget

A vacation home can be a great investment no matter how you slice it. Not only can it provide your family with a go-to spot to spend your summers and days off, but it’s also a solid way to generate extra income. Rent the property on Airbnb, VRBO, or other short-term rental platforms when you’re away, or renovate the property and sell it at a profit down the line.

Whatever route you take, you’ll want to choose your second home carefully and thoughtfully to maximize your returns. The right property in the right location can mean a lifetime of fun (or added income), or it could equal just another financial burden bringing you down and holding you back.

Want to make sure you pick the absolute best vacation home for your needs and budget? Here’s how:

  • Start with the location – Do your research and narrow down the right location first. If you’re going to use the home primarily for your own enjoyment, make sure it’s somewhere you can travel easily and often. A cabin for skiing in the mountains might be nice, but how often will you be able to visit? Think temperate, year-round weather and an easily accessible location. If you’re considering putting the property up for rent, also take into account tourist demand. Will others want to travel there, too? How much would they be willing to pay for it?
  • Pay attention to maintenance and repairs – Make sure you factor the costs of maintaining and caring for the house into your calculations. Remember that homes situated on the beach or near saltwater are going to have lots of wear and tear — and they may even need added protection from floods and hurricanes. Be sure to consider these as you evaluate properties to purchase.
  • Leave wiggle room for extras – Since this is a second home, you’ll likely need to fully furnish the property and fill it with décor, too, so set aside a separate budget for after-purchase expenses as well. This is especially important if you plan to rent out the property, as you’ll want the place to be comfortable and inviting to potential guests. You may also want to budget for toiletries and cleaning costs if renting is on your radar.

Your next home doesn’t have to break the bank. For more help finding a budget-friendly second home, details on our investor-friendly Doc Lite loans, or for more financing help, get in touch with an Embrace loan officer today. We can also help you with a cash-out refinancing if you need money for your down payment, to cover renovations on the property, or for furnishing and decorating the home (if you’re going the Airbnb route).

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By Aly Yale / February 20th, 2020 / Categories: / Tags: ,

Aly Yale

Aly J. Yale is a mortgage and real estate writer based in Houston. Connect with her at AlyJYale.com or on Twitter at @AlyJwriter.