But it takes a 10% down to buy a vacation home — and that's if the rest of your application is very strong (high credit score, low debts, and so on). If you have a lower credit score or higher debt-to-income ratio, your mortgage lender may require at least a 20% down payment for a second home.
However, there are some circumstances in which a 15% down payment can make more sense. For example, you might want to maintain a cash cushion after closing to buy furniture or complete renovations. Even though you'd pay more for your mortgage over the long term, you'd have more financial flexibility today.
It's significantly more difficult to qualify for a second mortgage or a HELOC than a first mortgage. To qualify you would use the current monthly housing payment and add the second mortgage payment to that. The maximum debt-to-income ratio is usually 45% with the second mortgage.
Con: Special Attention and Maintenance
As the owner, you will either need to pay for a landlord to take care of your house, or you will need to roll up your sleeves and do it yourself.
For the IRS to consider a second home a personal residence for the tax year, you need to use the home for more than 14 days or 10% of the days that you rent it out, whichever is greater. So if you rented the house for 40 weeks (280 days), you would need to use the home for more than 28 days.
Consider paying for your vacation home in cash or by getting a home equity loan on your principal residence if possible. Be prepared to make a larger down payment, pay more interest, and comply with stricter requirements if you apply for a standard loan.
That's because a primary residence provides shelter, whereas a second home is a “nice-to-have,” not a necessity. Lenders may consider applicants with a score of 620 or higher, though a score above 700 is preferable when qualifying for a second home mortgage.
Backman advises, “If you're someone who would be reliant on rental income to afford your second home, you may want to opt for a series of seasonal rentals you return to year after year.” As you can see, there are definite benefits and drawbacks to the life of a snowbird.
Buying a second home can potentially be a good investment as you may gain home equity if the home's value increases over time. You may also be able to rent out the property when you're not using it. However, rentals are limited to a maximum of 180 days per year.
To purchase a $200,000 house, you need a down payment of at least $40,000 (20% of the home price) to avoid PMI on a conventional mortgage. If you're a first-time home buyer, you could save a smaller down payment of $10,000–20,000 (5–10%).
Since you're assuming more of the financial risk, a 20% down payment puts you in a great spot to negotiate with your lender for a more favorable mortgage rate. A lower interest rate can save you thousands of dollars over the life of the loan.
You'll usually need a credit score of at least 640 for the zero-down USDA loan program. VA loans with no money down usually require a minimum credit score of 580 to 620. Low-down-payment mortgages, including conforming loans and FHA loans, also require FICO scores of 580 to 620.
A good way to remember the documentation you'll need is to remember the 2-2-2 rule: 2 years of W-2s. 2 years of tax returns (federal and state) Your two most recent pay stubs.
The FHA allows you to buy a second home for main living purposes but will not help you fund a second home to rent for money or as a vacation home.
When buying a second home, you'll likely need extra money in reserve that could cover your mortgage payments in case you have a temporary loss of income. Well-qualified individuals likely need at least two months of reserves, while less-qualified applicants may need at least six months of reserves.
Reasons for owning a second home
Diversify your investments: Owning a second home allows for getting beyond the usual stocks, bonds and 401(k) plan. A second home can also act as a buy-and-hold investment — real estate does tend to appreciate in value over time — and be a valuable asset to pass on to heirs.
Second homes require at least 10% down. The lender will need to verify you have sufficient funds for closing and between 2-6 months' worth of reserves to cover both your primary and second home loan payments.
You can buy a $300,000 house with only $9,000 down when using a conventional mortgage, which is the lowest down payment permitted, unless you qualify for a zero-down-payment VA or USDA loan. Different lenders have different rules, but typically they require a 620 credit score for conventional loan approval.
If you're going to convert the property into a short-term rental property, you can use websites like AirBnb and VRBO. You may also want to consider any offline opportunities to market your property if you're looking for longer term tenants.
Family Budget With A Two Million Dollar House
$3,000 more a month is $36,000 a year after tax, or about $50,000 more in gross income a year. If you had a down payment, you would need to make at least $400,000 a year income to afford a $2 million house.
According to the IRS, second homes can be rented out to generate income as long as you live there for more than 14 days a year or for more than 10% of the total days you rent it to others.
Debt to income ratio
The DTI mortgage requirements for a second home vary by lender, but your total debt load should be less than 36% to 50% of your gross monthly income. These limits ensure that you have enough money to pay taxes, monthly household expenses, and cover any unexpected bills that may occur.