What You’ll Learn
How a second home is defined by mortgage lenders
Why mortgage lenders need to know your intended use for a home
Mortgage and finance options when buying a second home
If you've been keeping an eye on the housing market's low interest rates, you may be wondering if now is the time to get that second home you've always dreamed about. Perhaps a slice of a paradise by the beach, or a cozy cabin in the mountains. While buying a property as your “second home” may seem pretty straightforward, lenders have specific guidelines for the property and its use for it to be considered a true second home. Learning the requirements can help you understand if a second home is right for you, or if your intentions are for a different type of property.
Here are the second-home guidelines you should know about and how you may qualify for a second home mortgage.
What makes a second home a second home?
In the eyes of your mortgage lender, a second home is not simply an additional property to go with your primary residence. To be officially classed as a "second home," the property must meet a number of occupancy requirements that help determine your mortgage eligibility, interest rates, down payment, and future tax bills.
While the exact rules may vary by lender, most consider a second home to be:
- A one-unit dwelling
- A property you live in for part of the year (typically a minimum of 14 days)
- A property that is livable year-round—even if you only visit in a particular season
- A property that is not going to be rented out or used as a timeshare
- A property that you have exclusive control over
Some lenders may also require that a second home is a certain distance away from your primary residence. It’s especially difficult to get a property qualified as a second home if it’s in the same city as your primary residence. In most instances, lenders will view these homes as investment properties.
Here's why these rules matter: Mortgage lenders require you to specify your intended use for the home because it can impact the level of risk associated with the mortgage.
Typically, when it comes to mortgages:
Less risk = Easier to qualify and lower mortgage rates
More risk = Harder to qualify and higher mortgage rates
Second homes fall into the “more risk” category, because your lender believes that you are more likely to cease making mortgage payments on a second home than you would on a primary residence. And that’s why they will generally charge higher interest rates, require higher credit scores, and expect you to have more cash to qualify.
The more stringent qualifying guidelines and costs may make it tempting to claim that your mortgage is for a primary residence. However, being untruthful about how you plan to use the home could be more trouble than it’s worth. While it may not seem like a big deal, this is considered mortgage fraud—a move that could lead to penalties or prosecution. Another possibility: Your lender could demand that you pay the balance of your mortgage in full—or they’ll foreclose on the home.
How a second home differs from other property types
When you apply for a mortgage, your lender will want to know if it’s for a primary residence, second home, or investment property. A primary residence is where you plan to live most of the time, and usually has the most straightforward mortgage approval process with the lowest interest rates. That’s because there is generally less risk associated with lending for primary residences. As far as the lender is concerned, primary residence homeowners are likely to prioritize payments for the roofs over their heads before other properties.
At the other end of the spectrum is an investment property, which is a home you own for money-making opportunities. This kind of property may be within 50 miles of your primary residence, and you're not likely to spend time living there.
As mentioned earlier, lenders consider non-owner-occupied homes to have an added level of risk because tenants would not likely have the same attention to maintenance and upkeep as owners living in the property. Owners are also less likely to prioritize paying a loan for a home that’s simply used to generate additional income than a home they live in or personally use. These factors make it harder to qualify for this kind of mortgage, which also typically comes with higher interest rates.
Second home mortgage requirements
During the underwriting process (which is when a lender reviews your financial documents to determine eligibility), your lender will want to confirm you can afford taking on a second mortgage. A lender will consider the payments, including property taxes and insurance, for your primary and second mortgage along with all your other expenses.
While specifics may vary by lender, to qualify for a second home loan, you’ll typically need:
- A high credit score and impeccable credit reports
- The ability to meet higher debt-to-income ratio requirements
- Several months of available cash, depending on your situation
- At least 10% for a down payment
It’s important to note that not all mortgage lenders provide financing for second homes, and you should confirm before you apply. (In case you’re wondering: Better Mortgage offers mortgages for second homes.)
How to finance a second home
According to a recent report from the National Association of Realtors, more than half of those buying a second home borrow money to make the purchase—and you can do so even if the mortgage for your primary residence isn’t fully paid off.
If your first mortgage is smaller than the home's value, it may be possible to tap your equity and borrow money from the property. You can achieve this with a home equity loan (HEL) or home equity line of credit (HELOC). A HEL allows you to borrow a lump sum, which can then be paid back over the course of 15 or 20 years. A HELOC, as the name implies, is more like a line of credit—you draw cash as needed during the “draw period” (typically 10 years) and then pay it back over the repayment period (often 20 years).
A cash-out refinance is another home equity option, which allows you to apply for a new mortgage on your primary residence that is above your current balance. The excess funds you cash out from your equity can then be used to finance your down payment or any other expenses for your second home. This loan option can be especially beneficial if interest rates have declined since you opened your first mortgage.
Keep in mind, any time you borrow from your home’s equity, you’re putting your property on the line for the loan. You could risk losing your home if you can't make the payments.
Better Mortgage has you covered
Deciding to buy a second home is an exciting milestone. But before you swan-dive into real estate listings, it helps to know exactly how much second home you can afford. Our pre-approval process takes as little as 3 minutes to complete and gives you confidence you need to put an offer on your own second home.