Can you buy a vacation home before your primary residence?

In several hundred U.S. cities, a median-priced home costs $1 million or more.

With a primary residence purchase out of reach, some renters are turning their attention toward buying a vacation home instead of buying a primary residence.

There's no rule against doing this, if you can qualify for the loan, but it's best to know the risks before making it happen.

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How lenders classify a vacation home vs. an investment property

When buying a vacation home instead of a primary residence, you'll likely lose the perks of buying a primary residence, things like single-digit down payment percentages and lower mortgage rates.

But it's important to avoid needing an investment property loan, which may require more than 20% down and come with higher borrowing rates.

Instead, try to find the happy medium: second home loans.

What are second home loans

According to Freddie Mac, whose rules help set standards for conventional lenders, you must occupy the vacation home for at least two weeks of the year to qualify for a second-home loan. The home has to be a one-unit dwelling suitable for year-round living. Some lenders may require the home be located in a different town or region.

The second home can't be placed under a rental, timeshare, or property-management agreement that limits your control over it.

Second homes that don't meet these requirements may be considered investment properties, and investment properties come with even stricter rules for borrowers.

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Can I rent out my second home when I'm not in it?

Yes, second home owners can earn income by renting out their homes for part of the year, but homeowners can't enter a lease agreement that limits their ability to use the home as a vacation home. This means the home can't become someone else's primary residence.

The IRS has its own set of rules to distinguish rental homes from second homes when it's time to report income from rent.

For instance, to qualify as a second home and not a rental home, you'd need to use the home for at least 10 percent of the time its rented. If you rented the home out six months of the year, that's about 180 days. You'd need to live in the home for at least 18 days.

Owning a rental home instead of a vacation home changes the way you file taxes. Check with a tax professional if you'd like more information about this.

How are second home loans different than primary residence loans?

Second home loans typically cost more than primary residence loans because they're riskier for lenders.

Here are some key differences:

• Down payment: Many primary-residence conventional loans allow down payments as low as 3%. Vacation homes typically require 10–20% down, and yours could run higher depending on your credit profile. See how much down payment you'll need for more.
• Interest rate: Vacation home rates usually run about 0.5 to 1 percentage point above a comparable primary-residence rate, since lenders see second homes as a higher default risk. (You're less likely to keep paying a home you don't live in full-time if money gets tight.)
• Credit score: Lenders tend to set a higher minimum credit score for a mortgage bar for second homes than for primary residences.
• Reserves: Expect lenders to require a couple of months of mortgage payments in reserve for a second home, on top of your down payment and closing costs.
• Federal options off the table: FHA loans, popular among first-time buyers, are designed for primary residences. USDA and VA loans have similar rules, though the VA program allows some flexibility so veterans can own multiple homes while moving.

None of this means financing a vacation home is a bad idea. But the math is different, and worth running before you fall in love with a listing.

How a second home can complicate buying a primary residence

Owning a vacation home can help and hurt your chances of getting approved on a primary residence loan later.

The vacation home can help if you get the loan paid down enough to benefit from its equity. For instance, if you bought a $300,000 mountain home this year and paid down the loan balance to $100,000 over 10 years, you'd have $200,000 in home equity. If the home appreciates by, say, $50,000 over that decade, you'd have even more equity, up to $250,000.

You could leverage this equity toward your primary residence purchase.

But there's a downside. The payment on the second home loan will go into your debt-to-income ratio, limiting how much of your monthly budget could go toward a primary residence.

Again, this is not a deal-breaker. It's just something to be aware of.

Frequently asked questions

I rent in an expensive city but found a lake house I love. Is it smarter to buy that before a primary home?

It can work if your finances comfortably support two housing payments, strong reserves, low existing debt, and room in your budget after the vacation home payment. If buying it would leave little room in your debt-to-income ratio, buying a primary residence first typically preserves more borrowing power and flexibility.

If I already have a mortgage on a vacation home, will that hurt my chances of qualifying for a primary residence loan later?

It can. The vacation home's full monthly payment counts against your DTI when you apply for the next mortgage, which can reduce the loan amount you qualify for on a future primary residence.

Should I buy a vacation home first or a primary residence first if I have a 750 credit score and no debt?

A high credit score and no other debt put you in a stronger position to carry two housing payments, since your DTI has more room before hitting a lender's cap. It's still worth running the numbers on your specific income and the vacation home's full carrying cost before deciding.

Is it harder to get approved for a vacation home loan than a primary residence loan?

Generally, yes. Lenders typically require a larger down payment, a higher credit score, and cash reserves for a second home, and government-backed programs like FHA, VA, and USDA aren't available for vacation homes at all.

Can I use rental income from a vacation home to help me qualify for a mortgage?

Usually not if the property is classified as a second home. Lenders typically only count rental income toward qualifying when the property is financed and classified as an investment property, which comes with different terms.

What happens to my taxes if I buy a vacation home instead of a primary residence first?

Mortgage interest can still be deductible up to the combined qualified-residence debt limit, but you won't have access to the primary-residence capital gains exclusion unless the vacation home later becomes your primary residence and you meet the occupancy requirement.

Can I turn my vacation home into my primary residence later?

Yes. This is a common long-term strategy, especially for buyers planning ahead for retirement. You'll need to actually make it your main residence and meet occupancy requirements for any tax benefits tied to primary-residence status.

The bottom line

Buying a vacation home before a primary residence isn't a shortcut and it isn't a mistake. It's a tradeoff.

You'll pay more upfront and face a stricter debt-to-income limit on your next mortgage application, and you'll give up FHA, VA, and USDA options along with the primary-residence capital gains exclusion, at least until the property changes status.

Still, if you live in a city where buying a primary residence costs a lot more than renting, the second-home-first approach may work well for you.

Get started with a no-obligation pre-approval.

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