Last Updated on September 18, 2024 by Luke Feldbrugge
A second home down payment is a bit more complex than getting your first mortgage for your primary residence. Generally, if you can afford a second home, you have some financial resources and some credit history with your mortgage lender. The question is: do you have enough?
That means more than just having enough for a second home down payment. As with any mortgage, your lender is going to want you to provide a complete financial review of your situation.
Important to note: As we talk about a second home down payment, we aren’t talking about investment properties. In this case, we are discussing homes that you will occupy some of the time. Sometimes those second homes will also be called vacation homes. We are not talking about a second home as an investment property that will only generate income for the owner. The rules for investment properties are different.
Down Payment Required for Second Home: Money, Credit Scores and More
The financial requirements for a second home down payment generally tend to be stricter than those for a primary residence. Mortgage lenders see a second house as a higher risk because in case of financial distress, a borrower is more likely to default on their second home mortgage than their primary one. Mortgage brokers may therefore have higher interest rates for the second property.
- Down Payment – Typically, the minimum down payment for a second mortgage is at least 10% and sometimes up to 30%, depending on the lender and the borrower’s creditworthiness. Most lenders prefer a down payment of 20% or more.
- Credit Score – You’ll also need a solid credit score — generally 700 or above — to qualify for a second-home mortgage with favorable terms.
- Debt to Income Ratio – Other financial considerations include your debt-to-income ratio, which should ideally be below 43% to be eligible for purchase of a second home.
- PMI – Remember, if you make a larger second home down payment, it can help you avoid the need for private mortgage insurance (PMI), which can add significantly to the monthly payments.
- Cash Reserves – Especially with a second home, you will need enough cash in your savings to cover your mortgage payments in case something happens to your income. At least two months of reserves that is easy to access is recommended.
- Proof of income – As with any mortgage application, you will need to provide your W2 forms, recent pay stubs, and a stable employment history.
Occupancy Requirements for Second Homes
When it comes to second homes, lenders also look at occupancy requirements. They want to ensure that the home will be used as a second residence and not as an investment property.
To be clear, you can rent out your second home, part-time, and use the rental income to help pay for it. It just needs to be clear to your lender that you will be occupying it for part of the year. That means you can rent it through an Airbnb service, but typically not through a timeshare or other rental management situation.
A second home is usually defined as a property that is a certain distance away from your primary residence (often 50 miles or more), and is occupied by the borrower for a portion of the year. The specifics can vary from lender to lender. Lenders may also require that the property be suitable for year-round occupancy.
How to Fund the Down Payment for a Second Home
Getting the cash together for the down payment can be a challenge. You can, of course, the best way is to save up enough money to pay the down payment up front using a conventional loan. But there are other financing options.
- Home Equity Loan – You can tap into your primary home’s equity to get either through home equity loans or a home equity lines of credit.
- Cash-Out Refinance – With this kind of refinance, you generally don’t get a better interest rate on your current mortgage, but you do get a chunk of extra money that you can use for the down payment on a second home.
- Retirement Savings – It’s best not to cash out your retirement savings, but you can often borrow money from your 401(k) and avoid the tax penalty. Then you just pay yourself back over time. Make sure your employer’s plan will allow this and work out any details associated with the policy.
- Gifts – According to Fannie Mae, you can use donated gift money – from an appropriate source like a family member – to pay a down payment for a mortgage on a second home.
With any of these scenarios, please first check with your lender or your financial planner, or both, before going forward with your plans.
Can You Get a No-Down-Payment Mortgage for a Second Home?
Yes, but it’s not easy or straight-forward. The most common no-down-payment options are government-backed loans like the VA Loan or the USDA Loan. With the VA Loan, guaranteed by the Department of Veterans Affairs, getting a second home involves factors such as timing, occupancy and your VA Entitlement.
With a USDA Loan, you can’t have two of these at the same time, and the USDA has occupancy requirements that make this loan option unfeasible. In addition, the income limits for USDA loans is quite low, so if you can afford a second home, you probably make too much to get one of these loans.
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