Buying a second home is a big upgrade, whether you’re laying claim to your favorite vacation spot or taking a first step into real estate investment.
But the costs involved with purchasing and maintaining a second home add up fast, and vary considerably depending on how you use the property. Mortgage options will also be based on your plans for using your second home. Here’s how to make sure you’re ready.
Reasons to buy a second home
There are plenty of scenarios in which a second home makes sense:
You want a vacation home, simply as a regular getaway or as a spot where you’ll eventually retire.
You need a commuter home, because you or your partner work far enough from your primary home to make a daily drive or train trip untenable.
You’re looking to upgrade by moving into a new house but keeping your current home as a rental.
You’re buying a home for a family member, perhaps to keep your parents close by or to give your college student a campus-adjacent pad.
It’s important to be clear about your plans because the way you use your second home affects your financing options and ongoing costs, not to mention the location and type of home.
If you want a commuter home or housing for your college student, buying a condo might make more sense than a detached single-family home. A rental house or a flip will need to appeal to tenants or buyers in order to be a sound investment. A vacation home that doubles as a short-term rental may be difficult to manage on your own if you don’t live near the destination.
How to buy a second home
Buying a second home includes many of the same steps you’ll remember from purchasing your current home. But the costs associated with a second home go well beyond another monthly payment. The mortgages you can use to buy a second home, and their qualification requirements, are different, too.
Consider all the costs of buying a second home
Amounts will vary depending on how you’re using the second home, but here are some of the costs you may want to incorporate into your monthly budget.
Insurance: Homeowners insurance on a second home generally costs more than on a primary residence. You may also need a different type of insurance depending on whether the second home is typically occupied and, if you’re renting the home, whether it’s a short- or long-term rental.
Utilities: If the home is a rental, the tenant may pay for utilities (as long as you have a tenant). But if it’s unoccupied for long periods of time, you’ll need to strike a balance between the energy use that’s necessary to keep the house livable, and what will keep you from having outsized monthly bills. You may also want to invest in a security system.
Maintenance: This can include major seasonal maintenance as well as basic upkeep — even if no one’s living in the home, your neighbors will appreciate a neatly mowed lawn. A property manager can be a big help here, but can take a big bite out of your bottom line.
Vacancy: Planning to rent the second home? Be sure you can cover costs if you don’t get tenants right away or if your short-term rental has an unexpected dry spell.
Travel: If you’ve bought a vacation home that’s far from your current home, don’t forget to budget for trips between the two properties.
Think about the big picture, too. Have you already met your other financial goals, like saving for retirement or paying off high-interest debt? If not, will the cost of owning a second home prevent you from achieving them?
Nerdy tip: The tax implications of owning a second home differ depending on whether it’s a second home or an income-generating property. You may want to consult with a tax professional or a tax attorney to be sure you know what kind of tax bill you might be facing. If you rent your second home for more than 14 days out of the year, it’s considered an investment property by the Internal Revenue Service. That determines what you can deduct, and means you must report rental income.
Decide how you’ll finance your second home
If you’re looking to finance the purchase of a second home, the best type of mortgage may depend on how you plan to use the home. Lenders typically offer different rates and may have different qualification requirements for second homes than they do for investment properties. (More on those in the next section.)
If you use a jumbo loan (or any other nonconforming or portfolio loan), most lenders will only consider the house a second home and not an investment property so long as you rent it no more than 14 days out of the year.
If you use a conventional loan, you can rent your second home for up to six months per year without it being classified as an investment property by your lender — so long as you didn’t use the home’s future rental income in order to qualify for the loan. Even then, the IRS may still deem your home an investment property, since they use their own set of rules.
Government loans are generally not an option for second homes, no matter how you plan to use the property. Only primary residences are eligible for mortgages backed by the Department of Veterans Affairs. The Federal Housing Administration makes some exceptions for commuter homes.
Qualify for a second-home mortgage
Whether it’s a vacation home or an investment property, lenders see second homes as riskier. The requirements for minimum credit scores are generally higher, and maximum debt-to-income ratios are lower than for a primary residence.
You’ll probably need to make a larger down payment on your second home, ranging from roughly 10% for a conventional loan to more than 20% for a jumbo loan. That big down payment can substantially increase your upfront costs, but potentially lower your lifetime costs if it results in a better rate.
If you intend to use future rental income to help qualify for the loan — whether it’s from renting the second home or renting your current home after you move into the second home — you’ll face additional hurdles.
Demonstrating income potential from a home that’s already a rental isn’t too hard, so long as the seller is willing to share that information. If the home isn’t currently rented, the lender may want a rental appraisal to show that the property is marketable.
Even if you’re confident you’ll qualify for a second-home mortgage, take the time to comparison shop lenders to make sure you’re getting the best possible deal.
Work with a real estate agent to find your ideal second home
Finally, the fun part! Whether you’re looking for a vacation home in a far-flung part of the country or an income-producing rental property in your neck of the woods, you’ll want to work with a real estate agent who’s local to that area.
If you’re looking long distance and can’t visit the property in person, a good agent can be your eyes and ears (and nose) on the ground. But even for a nearby property, a local agent may have a better understanding of what will make a promising rental property or, if you’re moving up and out, how to make your current home more appealing to your future tenants.
Summary: Buying a second home
To recap, here are the initial steps to buying a second home.
Decide on your goal. How you plan to use the second home will help you fit it into your current financial picture, and consider its pros and cons for your future.
Create a budget. Crunch the numbers to determine how much cash you’ll need on hand, how much you may be able to borrow and what your ongoing budget will look like.
Compare lenders. Figure out what type of loan you’ll use, shop at least three second-home loan lenders and get preapproved.
Start shopping. Work with a real estate agent who’s local to the area where you’re purchasing your second home.