This article is for educational purposes only. JPMorgan Chase Bank N.A. does not offer Home Equity Loans nor Home Equity Lines of Credit (HELOC) at this time. Please visit our HELOC page for future updates. Any information described in this article may vary by lender.
If youre looking to buy a family vacation home, chances are youll need to get a mortgage for that property. A mortgage on a second home is different than a mortgage on a primary residence.
While some people can afford to purchase a second home using cash, most need to take out a mortgage. According to a survey by the National Association of Realtors Research Department, nearly half of all vacation home buyers and investors finance up to 70% of their purchase.
Heres an outline of things you need to know about financing a second home. This includes whether you can afford a second home, options for making a down payment and more.
Purchasing a second home can be an exciting prospect. A vacation home, rental property, or pied-à-terre in the city opens up opportunities for rental income and additional space for yourself and your loved ones. However, qualifying for a second home loan requires more consideration than financing your primary residence. Lenders view second home loans as riskier, so you’ll need to meet more stringent requirements. This comprehensive guide covers everything you need to know to successfully qualify for a second mortgage.
What is a Second Home?
Before we dive into the details on qualifying, let’s clarify what constitutes a second home:
- It is a one-unit property used for personal enjoyment that you occupy for a portion of the year. This differentiates it from an investment property that exists solely to generate rental income.
- You can rent out a second home when not using it yourself, but there are limits on rental days (typically 180 days/year).
- It cannot be subject to timeshare or fractional ownership.
- You cannot claim any tax benefits for it as a primary or rental residence.
Common examples are vacation homes and pied-à-terres in another city
Second Home Loan Requirements
Qualifying for a second home loan is more rigorous than for your first home This is because lenders see second homes as a higher default risk, so they want to ensure borrowers can truly afford the payments Here are some key requirements to be aware of
Down Payment
- Conventional loans require a minimum down payment of 10-15%.
- Jumbo loans typically require at least 20% down.
- Options for low down payment second home loans are very limited.
Credit Score
- Most lenders look for a minimum credit score around 680-700. Requirements are higher than for primary mortgages.
- The higher your score, the better your chances of approval and lower interest rate.
Debt-to-Income Ratio
- Your DTI ratio must be below 43% in most cases. Total monthly debt payments divided by gross monthly income.
- DTI requirements may be higher for borrowers with excellent credit scores and large down payments.
Loan-to-Value Ratio
- The LTV ratio compares loan amount to appraised home value. Keeping this ratio low (with a larger down payment) improves your chances of approval.
- LTV ratios allowed vary by lender, typically 80-90% LTV for a conventional second home loan.
Reserves
- Lenders want to see you have cash reserves, usually at least 12 months’ worth of mortgage payments. This provides a buffer in case you face financial hardship.
- Reserves requirements depend on your credit score and down payment amount.
Home Equity
- If using a cash-out refinance on your primary home, most lenders require at least 15% equity in that property.
Having a strong financial profile and meeting these parameters is key to qualifying for a competitive second mortgage rate
Documentation Needed
When applying for a second home loan, the lender will ask for various documents to verify your financial situation, including:
- Tax returns for past 2 years
- W-2s and recent pay stubs
- Documentation of assets such as bank statements
- Investment account statements
Being well prepared with these documents will help streamline the application process.
Second Home Loan Options
While government-backed loans like FHA and VA don’t allow second homes, you do have several financing options:
Conventional Mortgage
The most common option is a conventional loan from a private lender. You’ll need a good credit score and substantial down payment. Interest rates may be 0.25-0.5% higher than primary home loans.
Jumbo Mortgage
Jumbo loans work for high-cost second homes, with loan limits that can exceed $1 million. Requirements are stricter than conventional mortgages.
Cash-Out Refinance
Tap equity in your primary residence to make the down payment through a cash-out refinance. Make sure your credit and home value allow you to qualify.
Home Equity Loan/Line of Credit
Borrow against existing home equity with fixed-rate second mortgage or revolving line of credit. Rates are often variable.
Carefully compare options to find the optimal loan type, rate, fees and borrowing limits for your situation.
Tips for Approval
Here are some tips to boost your chances of successfully qualifying for a second home mortgage:
-
Make a sizable down payment of 20% or more if possible. This shows the lender you are financially committed.
-
Have excellent credit. Take time to check reports, dispute errors, and pay down balances. Aim for a score over 740.
-
Lower your DTI. Reduce other monthly debts and housing expenses before applying.
-
Have ample cash reserves. Lenders look for 9-12 months’ worth of mortgage payments in savings as a safety net.
-
Choose a lower-priced home to make payments more affordable. Don’t max out your borrowing limit.
Meeting the typical second home loan requirements takes planning and discipline. But the payoff can be well worth the effort.
Working with a Trusted Lender
Partnering with the right lender makes a major difference in having a smooth experience qualifying for and obtaining a second mortgage. Look for a lender that:
- Specializes in second home lending
- Offers personalized guidance on the best loan options
- Has competitive rates and reasonable fees
- Makes the application process easy
- Can close quickly once an offer is accepted
As a top national lender, Rocket Mortgage has extensive experience helping borrowers finance second homes. Their online process allows you to easily apply and get fully approved in as little as 8 minutes. With a powerful mortgage platform, Rocket Mortgage offers speed and service when you need financing.
FAQs on Second Home Loans
How soon can I get a second mortgage after buying my first home?
Most lenders want to see you have a solid 12-24 month history of on-time payments on your current primary mortgage before taking on another property loan. However, waiting even longer can improve your approval chances.
Can I use retirement funds for a second home down payment?
Yes, you may be able to use a 401k loan or IRA withdrawal without penalty to make the required down payment. Be aware of the rules and tax implications.
What are closing costs on a second mortgage?
Closing costs range from 2-5% of the total loan amount. This covers lender origination fees, third-party fees, taxes, insurance, etc. The costs are similar to purchasing a primary residence.
Can I deduct mortgage interest on a second home?
If used personally, you can deduct the mortgage interest on second homes of up to $1 million in value. Investment properties don’t qualify for the deduction.
Ready to Qualify?
The differences between mortgages on primary residences and second homes
On your primary mortgage, you might be able to put as little as 5% down, depending on your credit score and other factors. On a second home, however, you will likely need to put down at least 10%. Because a second mortgage generally adds more financial pressure for a homebuyer, lenders typically look for a slightly higher credit score on a second mortgage. Your interest rate on a second mortgage may also be higher than on your primary mortgage.
Otherwise, the process of applying for a second home mortgage is similar to that of a primary residence mortgage. As with any loan, you should do your research, talk with multiple lenders and choose the loan that works best for you.
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This article is for educational purposes only. JPMorgan Chase Bank N.A. does not offer Home Equity Loans nor Home Equity Lines of Credit (HELOC) at this time. Please visit our HELOC page for future updates. Any information described in this article may vary by lender.
If youre looking to buy a family vacation home, chances are youll need to get a mortgage for that property. A mortgage on a second home is different than a mortgage on a primary residence.
While some people can afford to purchase a second home using cash, most need to take out a mortgage. According to a survey by the National Association of Realtors Research Department, nearly half of all vacation home buyers and investors finance up to 70% of their purchase.
Heres an outline of things you need to know about financing a second home. This includes whether you can afford a second home, options for making a down payment and more.