UPDATED: May 22, 2024
Buying a second home is a big commitment. It may be your first experience with real estate investments, or it could serve as your vacation home for part of the year.
However, there are considerable costs involved, and your mortgage options may vary depending on what you intend to do with the property. In this article, we’ll go over the steps to buying a second home and financing options.
There are several types of properties and a number of reasons why people might want to buy a second home. Below are the most common reasons.
An investment property is real estate purchased with the intention of making a profit, either through rental income or appreciation. One option is to buy a home, fix it up and then flip it for a profit. Another is to purchase the property and either turn it into a short-term rental, like an Airbnb, or a long-term rental property and collect rental income.
A vacation home is a secondary property mainly used for recreation or vacationing. When not being used by the property owner, vacation homes may also be rented out to generate passive income. Some lenders require that you spend a certain number of days at your vacation home. Others may also require the property to be a minimum distance from your primary residence.
A secondary residence is a home you live in for part of the year in addition to your primary residence. According to the IRS, a second home is one that you live in for at least 14 days during the tax year.
You can also generate income from a second home. Your property may still be classified as a secondary residence rather than an investment property as long as you live there for a number of days equal to at least 10% of the days the home is rented, or 15 days per year. Guidelines for tax purposes are very specific, so be sure to do your research.
Buying a rental property is similar to purchasing an investment property. A rental property is a type of real estate investment, but the sole purpose of the property is to rent to short- or long-term tenants and generate passive income. A residential rental property can be a single-family home, condo, apartment, townhouse or a duplex.
Buying a home, whether it’s your primary residence or a second home, is a big financial investment. However, the process of buying a second home will look a little different.
Similar to buying a primary residence, mortgage lenders will look at your income, assets and credit history to determine whether you’re financially prepared to make the commitment. But be prepared to make at least a 10% down payment on a conventional loan, and 20% or more on a jumbo loan. You’ll also need to meet the lender's income, credit score and debt-to-income requirements, which vary by lender and loan type. These requirements tend to be stricter than for a primary residence.
Below are key factors a lender will consider before approving financing for a second home.
Qualifying for a loan on a second home is often more difficult than it is for a primary home. Lenders are more careful about approving financing on second homes because there’s a higher risk of default on the mortgage. If a borrower already has a primary mortgage, it may be more difficult to manage payments on a second property. Additionally, most borrowers prioritize payments on their primary residence over a second home during times of financial hardship. This increases risk for lenders, and they may not be able to recoup their investment in the event of default on the loan.
The costs of buying a home are a bit different for second homes as you’ll have expenses to consider beyond closing costs and monthly payments. Here are costs that home buyers will need to consider and how they might be different for a second home.
The tax effects of buying a second home can also be different depending on the property type. For example, if you rent out your home for more than 14 days and earn rental income, you must report the revenue on your tax return, and the net income is taxed as ordinary income. Consider consulting a tax professional about the full tax implications.
As a homeowner, you may be familiar with the home buying process. However, the process of buying a second home is a little different. Here are the steps.
The first step when buying a second home is to determine the type of property you want to purchase. Consider the reason why you want to purchase the property. Do you want a home where you can vacation or live part-time, or do you want a property that will earn you passive income? How you plan to use the property will help you decide whether the home will fit into your budget and whether it matches your needs.
Getting preapproved for a mortgage is an important step in the home buying process. This will better help you understand the type of property you can afford. Plus, most sellers won’t accept an offer from buyers without a verified approval. This is a preapproval letter that includes verification of the borrower’s income, assets and credit score.
It’s a good idea to work with a real estate agent who is familiar with the local market to buy a second home. A knowledgeable real estate agent will know what’s required in your local market, give you expanded search power and can help you negotiate a fair price with the seller. Find an agent with experience buying homes that are similar to the one’s you’re interested in.
Once you find a property that you’re interested in, your real estate agent can help you put together a competitive offer. Your agent can also negotiate the price with the seller on your behalf. Once your offer is accepted, you’ll get the home inspected and appraised before beginning the closing process.
Before you receive the keys, you’ll go through the closing process on your second home. You’ll make the necessary down payment, buy homeowners insurance and title insurance and then sign all closing paperwork.
Here are some options when it comes to financing your second home:
Buying a second home opens up the door to potential income or a place to use as your personal escape. Before you jump in, make sure you’re financially prepared to keep up with costs and take the time to find the right type of property that matches your budget and needs.
Ready to get started? Connect with a real estate professional today to begin the home buying process.
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