Buying a second home: How-to and requirements

A second home can serve as a vacation getaway, an investment opportunity, or a future retirement spot. This article walks you through how to decide if owning a second home is the right move for you and the steps needed to purchase one.

How does buying a second home work?

Living the dream—that’s how many folks would describe getting away from it all to spend time in their own vacation home. And it can be. Whether you’re considering the purchase of a second home for weekend getaways, generating passive income, or planning for retirement, taking the right steps can help you turn the dream into a reality.

When compared with buying your first home, the requirements for purchasing a second are more involved—both financially and otherwise. First, we’ll look at the general steps needed to acquire a second home, then we’ll explore financing options.

How to buy a second home

The general steps to purchasing a second home are straightforward and very much like those taken when purchasing a primary residence.

Step 1: Assess your financial readiness.

Before you start looking for properties, consider these factors:

• Do you have a solid credit score?
• Does your debt-to-income ratio signal that you can take on more debt?
• Have you established an emergency fund?
• Are you contributing to your retirement?
• Do you have the cash required for a down payment on a second home and closing costs?
• Can your monthly budget accommodate the projected expenses for both mortgages?
• Do you have the cash reserves that many lenders require?

Step 2: Choose a location and property.

When deciding on a location and property, keep the following in mind:

• Planned uses: How will you use the property? Renting it out for more than 14 days per year triggers tax implications like declaring additional income, eligible deductions, and how they can be deducted. It’s best to consult a tax professional to ensure proper tax filing.
• Property type: What kind of property are you looking for and what are the implications (i.e., condo vs. single-family home, vacation home vs. investment property)?
• Local market: Research property values, taxes, insurance costs, and rental demand in the area.

Step 3: Secure financing.

Financing a second home comes with more conditions and complexity than taking on a first mortgage (more on that later). You’ll want to engage in the following tasks:

• Explore mortgage options.
• Get pre-approved by your lender to understand what you can afford and show sellers that you’re serious.
• Compare rates and down payment requirements.

Step 4: Find a local real estate agent.

An agent with local expertise can help you:

• Understand the local market.
• Identify properties with good value and potential.
• Negotiate a competitive purchase price.

Step 5: Make an offer and close.

• Work with your agent to submit an offer and begin due diligence like scheduling inspections, appraisals, and a title search.
• Finalize the purchase by signing documents, paying closing costs, and officially transferring ownership.

Second home mortgage requirements

A conventional mortgage (a private mortgage that’s not backed by the government like a Federal Housing Administration (FHA) loan) is a common way to finance a second home. However, lenders see second homes as a riskier venture and set a higher bar for entry. The vetting process is more stringent, and interest rates tend to be higher. FHA and Veterans Affairs (VA) loans are usually not available for second home purchases, because they are primarily designed to make home ownership more accessible and affordable to a wider range of borrowers.

Qualifying for a second mortgage

To qualify for a second mortgage, you’ll typically need:

• A credit score of 680 or higher. A credit score that’s 640 or higher may be permissible with a higher down payment. First mortgages, on the other hand, usually require a minimum of score of 620.
• A debt-to-income ratio below 45% is generally acceptable. While this is higher than the 36% or lower for a first mortgage, higher interest rates usually apply.

Minimum down payment for a second home

A down payment is an important requirement for a mortgage. Most lenders require at least 10% down, but for second mortgages 20% is more common. While that means coming up with more money up front, a higher down payment can help you secure better terms like no requirement to purchase separate mortgage insurance. Whether purchasing a first or second home, a life insurance policy can also help protect your family’s interest in the home.

Using a HELOC to buy a second home

Using a home equity line of credit (HELOC) to buy a second home allows you to borrow against the equity in your current home to fund the purchase. It’s a flexible financing option, especially if you don’t want to dip into savings or investments. With a HELOC, you’re approved for a line of credit based on your existing home’s value and how much you still owe. You can use the funds as needed, and interest is usually paid only on the amount you borrow. This can be a smart way to tap into the equity you’ve built up in your home. Just remember that your home serves as collateral, so missed payments carry real risk.

Although both HELOCs and home equity loans are based on the equity you’ve built up in your home, several factors set them apart:

• The interest rates of a HELOC are variable, while home equity loans have fixed interest rates.
• With a HELOC, you only pay interest during the draw period. With a home equity loan, you make interest and principal payments from the beginning.
• A HELOC allows you to borrow money as needed, based on a predetermined credit limit. A home equity loan, on the other hand, is more like a conventional loan that provides a lump sum with a set repayment date.

Other options for financing a second house

If a HELOC or a conventional loan doesn’t fit your needs, other methods of financing include:

• A cash-out refinance: It allows you to access the equity you have in your primary residence by replacing your primary mortgage with a larger loan. You can then use the extra money for expenses like a down payment on a second home.
• Non-QM loans, or non-qualified loans, are meant to make mortgages accessible to buyers who have a hard time qualifying for conventional mortgages. Self-employed individuals, contractors, or retirees who do not have W-2s or other income documentation may be able to secure financing with a non-QM loan. There are caveats to this type of loan: The interest rates and down payment may be high. Because these loans may be used to acquire funding after a bankruptcy, or if you have a debt-to-income ratio that exceeds the conventional limits, you only pursue this type of financing if you’re certain that you can meet the repayment terms.

Can I afford a second home?

Although the affordability of a second home includes your ability to maintain an emergency fund, make contributions to retirement, cover the down payment, and take care of monthly expenses on both homes, that’s not where it ends. Additional considerations should include:

• The extra time and responsibility that a second home demands. It can seem like a new repair is needed every time one is completed.
• The costs of traveling to and from the second property.
• Home security, especially if the property will be vacant for extended periods.
• Potential HOA fees.
• Paying for utilities on the second property.
• Rental management fees, if applicable.
• Do you need to prioritize paying off high-interest credit card debt?

How much can I afford to spend on a second home?

A good rule of thumb for determining the affordability of a second home is to make sure that your total monthly housing expenses (for both properties) stay below 36% of your gross monthly income. You’ll want to include emergency repairs in your budget.

Calculating the mortgage of a second home

An online mortgage calculator can help you estimate what your second mortgage payments will be, including:

• Principal and interest
• Property taxes
• Insurance
• HOA fees, if applicable
• Potential maintenance and property management costs

The bottom line: Should I buy a second home—is it worth it?

A second home can be a smart financial move, a rewarding lifestyle upgrade, or both—but only if you’re prepared for the costs and responsibilities. If your finances are in order and you’ve done your homework, it could be the right next move. 

 Because everyone has different goals, and circumstances vary, the information in this article, or any article for that matter, should not be taken as individual investment advice. Instead, use this information as a guide for discussing your investment options with a financial professional, preferably a fiduciary. If you don’t have one, we can connect you with an experienced financial professional in your area.

Buying a second home FAQs

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