How to Buy a Second Home
If you visit the lake regularly or love the idea of having a home away from home, it may be worth it to invest in a second home. With mortgage rates still near historic lows, now may be the time to buy property in your favorite vacation or travel destination.
Second Home Loan Requirements
There are specific requirements for defining a second home. Fannie Mae’s second home requirements are:
- It cannot be a full time rental or investment property. Second home loans tend to have lower rates than rental and investment properties.
- Restricted to single-unit dwellings.
- Must be suitable for year-round occupancy.
- Cannot be subject to any agreements that give a management firm control over the occupancy of the property.
- The borrower must have exclusive control over the property.
You may also need to need to meet minimum distance requirements from your primary residence. If it is located in a recreational area such as a lake or a ski resort, the minimum distance requirements may not be required.
Conventional Financing for a Second Home
The loan process is similar to purchasing a primary residence with small differences in minimum down payment and reserve requirement. 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. Since government loan programs (FHA, VA, USDA) are not available for second home financing, let’s look at other financing options.
Second Home Financing: Cash-Out Refinance
A cash-out involves refinancing your primary residence mortgage and receiving cash for the remaining equity. You need sufficient equity in your home for this to be an option. For example, if you owe $100,000 on your home worth $500,000, you may be able to cash out up to 80% loan-to-value (LTV), which would be $400,000 minus the $100,000 you owe. This leaves you with $300,000 in cash to purchase your vacation property. You can choose term options from 5-30 years fixed or adjustable, plus you’ll have one monthly payment, not two.
Second Home Financing: Home Equity Line of Credit (HELOC)
A Home Equity Line of Credit (HELOC) adds your loan to your primary residence. Typically, this loan will not pay off your current mortgage, but be a second lien adding to your monthly expense on top of your current mortgage. Depending on the lender, this loan may go to a LTV higher than 80%, which helps if you need more funds than what 80% will allow. The drawback is this type of loan is typically adjustable and at a higher rate than today’s conforming loans.
Opinions expressed above are the personal opinions of RCB Bank personnel and meant for generic illustration purposes only. For specific questions regarding your personal lending needs, please call RCB Bank at 855-BANK-RCB. With approved credit. Some restrictions apply. RCB Bank is an Equal Housing Lender and member FDIC. RCB Bank NMLS #798151.