Buying a Second Home
Buying a second home is an exciting venture! Whether you’re looking for a vacation retreat, an investment property, or a future retirement home, we’ve outlined some of the pros and cons to consider when buying a second home, as well as the first steps and requirements on the financing side.
Pros
› A PERSONAL GETAWAY!
Owning a second home is great for having a place to go getaway and create more memories with. Maybe you want to purchase a cabin to go getaway during the summer when it’s hot!
› RENTAL INCOME
Maybe you want to use this as a short-term rental/Airbnb, there are a lot of pros in capitalizing off the income generated from your second home and using it to pay it off early.
› ADDS TO YOUR ASSETS
Owning a second home adds to your assets and with home values generally appreciating, it can be an asset that becomes more valuable over time.
Cons
› STRESSFUL IF YOU’RE NOT FINANCIALLY READY
It’s important to make sure you are financially ready to take on a second home/mortgage, even if you have plans to use it as a short-term rental. Do you have a good amount of cash saved to help with repairs or things that come up along the way? Will owning a second home eat at too much of your budget to where you can’t live comfortably?
› MAINTENANCE AND PROPERTY MANAGEMENT
If using this as a rental, someone needs to be responsible for making the repairs. This could add additional time and money and be stressful for some.
› NEEDING MORE MONEY DOWN AND MORE MONEY IN RESERVES
When buying a second home, you need to put more money down and have more money in the bank. While this isn’t necessarily a con, due to it helping buyers be financially ready to take on a second mortgage, it can be if it eats at too much of your savings allowing you to not live comfortably.
Mortgage requirements to buy a second home:
When it comes to buying a second home/investment property, the mortgage requirements can be different from those for a primary residence, and can be more strict. For starters, you won’t be able to use a government-back mortgage program like an FHA or VA loan. You will also likely need to put 10% or more down for the down-payment. If your second home is classified as an investment property, you might need to put even more money down, and you might have a higher interest rate. Take a look below at some typical requirements when considering purchasing a second home:
Down payment
Down payments can vary, but you can expect to put 10%-20% down. A larger down payment may provide a more favorable interest rate.
Credit score
As with buying your primary residence, your credit score will be a factor in approving you for your loan, as well as determining your interest rate.
Debt-to-income ratio
Your debt-to-income (DTI) ratio is assessed to determine if you can comfortably afford the mortgage payments, and how much you can qualify for. Generally you will need to stay below 43% DTI, and this will include your existing mortgage.
Rental Income Consideration: If you plan to rent out your second home, your potential income may be able to be considered when being approved for your loan.
Income Verification
As with your primary residence, your income will need to be verified for your loan to be approved.
Reserves
When buying a second home, typically reserves are required. Reserves are additional funds set aside in savings or investment accounts that can cover several months’ worth of your mortgage payment and other expenses.
Being a mortgage broker myself and working with various lenders along with my experience, I’m able to assist my client’s financial needs when buying a second home and present them with the best options for their financial situation.
If you are interested in just discussing if owning a second home is right financially for you, let me know and I am happy to talk with you!