Everything You Need To Know About Getting A Conventional Loan For A Second Home

Purchasing a second home can be an exciting prospect. Whether you want a vacation getaway or investment property, having a second piece of real estate opens up new possibilities.

But qualifying for a mortgage on a second property is different than getting a loan for your primary residence. Conventional loans are a popular option for financing second homes, but they come with unique requirements.

In this comprehensive guide we’ll explain what conventional loans are, their benefits for second homes, eligibility and down payment rules, and tips for getting approved.

What Is A Conventional Loan?

A conventional loan is a mortgage that is not backed by a government agency like FHA or VA loans These loans are issued directly by private lenders like banks and credit unions

Conventional loans come in two main types

• Conforming loans – Loans that conform to guidelines set by Fannie Mae and Freddie Mac. For 2023, the conforming loan limit is $726,200.

• Non-conforming loans (jumbo loans) – Loans that exceed the conforming loan limit. The minimum for a jumbo loan is typically $600,000.

Because they are not government-backed, conventional loans typically have stricter eligibility requirements in areas like down payment, credit score, and debt-to-income ratio. However, they offer more flexible use of funds compared to FHA and VA loans.

This makes them a preferred financing option for second homes and investment properties.

Benefits Of A Conventional Loan For A Second Home

Here are some of the biggest perks of choosing a conventional mortgage for your second property:

Lower interest rates – Conventional loans will have lower rates than FHA and VA loans. This results in lower monthly payments and long-term interest costs.

Lower mortgage insurance – Conventional loans require private mortgage insurance (PMI) if your down payment is under 20%. PMI rates on conventional loans are lower than FHA loans.

No occupancy requirements – You aren’t required to live in the property for any period of time. This provides more flexibility.

Wider use of funds – Conventional loans place fewer restrictions on how you can use the mortgage proceeds compared to government programs.

No prepayment penalties – You can pay off a conventional loan early without any penalties. This allows more flexibility if you sell.

Easier to qualify as a second home – Lenders impose occupancy requirements on FHA loans and some VA loans. Conventional loans have more flexible second home rules.

Conventional Loan Requirements For Second Homes

While conventional loans offer advantages for second properties, you’ll need to meet stricter eligibility standards:

Higher down payment – Expect a 10-20% down payment requirement. Jumbo loans generally require at least 20%.

Higher credit scores – Most lenders look for FICO credit scores of at least 660-720 for conforming loans. Jumbo loans often require scores over 700.

Lower DTI – Your total debt-to-income ratio should be below 45%. But a ratio closer to 36% improves your chances of approval.

Full home appraisal – Lenders will order a full appraisal on the property to ensure the value supports the sales price.

Tax returns/W-2s – Be ready to provide your most recent 1-2 years of tax returns and W-2s to verify your income and employment.

Bank statements – Lenders may ask for recent bank statements to show you have enough funds for the down payment and closing costs.

No VA/FHA loans on other properties – To qualify for a conventional second home loan, you can’t have any current VA or FHA loans on other properties you own.

Meeting these standards demonstrates you can manage the expenses and risk of a second home. Having a sizable down payment and low DTI also ensure you have enough equity in the property.

How Much Are Down Payments On Conventional Second Home Loans?

Down payment requirements for conventional second home loans fall into two main tiers:

10% down payment – This is the minimum for a conforming loan provided you meet other requirements like credit score and DTI. 10% down on a $500,000 home is $50,000.

20% down payment – You’ll need at least 20% down for a jumbo loan. For a $1 million second home, your down payment would be $200,000.

In some cases like a low credit score or very high loan amount, a lender may require 25-30% down or more on a conventional second home loan.

The larger down payment protects the lender by ensuring you have enough equity in the home. While 10% down is allowed, a 20% down payment or higher is recommended whenever possible.

7 Tips For Getting Approved For A Conventional Second Home Loan

If you want the best terms and lowest rate on a conventional mortgage for your second home, follow these tips:

1. Shop around with multiple lenders – Compare loan estimates to find the best rates and fees. Avoid just relying on your existing bank.

2. Work to improve your credit score – Anything over 720 will yield better loan terms. Pay down balances and dispute any errors.

3. Lower your DTI – Pay off credit cards and other debts. Ideally keep your DTI below 40%.

4. Save for a down payment of 20% or more – This results in better rates and avoids PMI.

5. Keep income and job history consistent – Changing jobs before applying can hinder approval chances. Avoid gaps in employment.

6. Document funds you have saved – Provide bank statements showing you have cash put away for the down payment and closing costs.

7. Opt for a shorter loan term – 15- or 20-year mortgages demonstrate you can handle higher monthly payments.

Following these tips sets you up for success when applying for a conventional loan for a second property.

Alternatives If You Don’t Qualify For A Conventional Second Home Loan

If you don’t meet eligibility requirements for a conventional mortgage, here are two alternatives to consider:

Portfolio Loan – Smaller banks and credit unions may offer portfolio loans. They carry higher rates but have more flexible underwriting standards.

Hard money loan – A hard money loan is all-cash financing, usually for 6-12 months. Rates are high but hard money lenders don’t look at credit score or income.

These options provide shorter-term financing while you work to improve your financial picture and credit. This allows you to qualify for more favorable financing in the future.

The Bottom Line

A conventional loan provides an efficient way to finance a second home purchase. Conventional mortgages offer built-in perks ideal for vacation and investment properties.

Be prepared for stricter eligibility standards in areas like credit score, down payment amount, income verification, and debt-to-income ratio compared to financing a primary residence. Following the tips above will set you up for getting approved for a second home conventional loan with the best terms.

Frequently Asked Questions

Can I get a conventional loan for a second home?

Yes, conventional mortgages are a popular option for financing second homes. You’ll need to meet stricter requirements for down payment, credit score, income, and DTI ratio.

What is the minimum down payment for a conventional second home loan?

The minimum down payment is typically 10% for a conforming loan. Jumbo conventional loans usually require a 20% down payment or higher.

What credit score do I need for a conventional second home mortgage?

Aim for a credit score of at least 720. Requirements may be higher for jumbo loans exceeding conforming limits. Scores below 660 will face much tougher approval odds.

Can I use a conventional loan to buy a vacation home?

Absolutely. Conventional loans place fewer restrictions on second home use compared to FHA and VA loans. This makes them ideal for purchasing a vacation property.

How do the rates compare between conventional and FHA second home loans?

Conventional loans will have lower interest rates than FHA loans. This is because conventional mortgages are not government-backed. The lower rate results in savings over the loan term.