What You Need to Know About Buying a Second Home
Vacation me is the best me. Whether I’m on some sunny, far-flung island, exploring a bustling city, or hiking in the crisp mountain air, I’m relaxed and happy down to my very core, at a cellular level. Heck, I don’t even mind packing and outbound flights (unpacking and return flights are a different story).
What if I had the chance to be vacation me all of the time? While I’ve casually explored real estate in vacation destinations, my search has stopped there—a second property in addition to my current home simply isn’t possible for me.
But for many Americans, the thought of a second home is enticing and viable. So, how do you buy a second home? Keep reading for practical considerations and a course of action, and don’t forget to browse neighborhoods.com for expert, insider info on desirable neighborhoods across the country.
Get Real Before You Get Real Estate
The first step toward buying a second home is being honest with yourself. While the reasons are unique and completely personal, many people get serious about second homes to spend more time at a beloved vacation spot. Vacations are fun, but would you really want to live in that destination? What would you do if you owned a property there?
Of course, there are other reasons to buy a second home, such as a property for when you retire, or even as an income property you wouldn’t plan to visit at all. Income properties aside, if you’re planning on a more vacation-oriented second property, consider how often—realistically—you’d be able to visit, and for how long. Factors like your job’s flexibility, family needs, and, of course, finances, all come into play here.
To get a mortgage for a second home, you’ll need a higher credit score than scores needed to obtain a primary residence.
Understand Differences in Lending
A home is the biggest purchase you’ll make in your life—and a second home is just as big a commitment, if not more. That’s in part because it’s harder to get a mortgage: Lenders are strict and stringent for second-home purchases.
First of all, according to The Mortgage Reports, you’ll need a higher credit score than scores needed to obtain a primary residence. Fannie Mae, for example, requires a minimum FICO score of 620 for primary home loans. For vacation homes, that number jumps to 640.
Next, you’ll need to make sure your debt-to-income requirements (DTI) measure up against stricter scrutiny. Fannie Mae allows for a DTI up to 45 percent with a 660 FICO credit score. That’s fairly generous for one home, but add in a second home, and it might not be enough. Let’s say you make $5,000 a month before taxes. To maintain a 45 percent DTI, your total payments for your home, second home, and any other loans (such as a car loan) can total no more than $2,250.
What’s more, second homes don’t qualify for FHA loans or VA loans, which often come with low-down-payment or no-down-payment terms. Instead, you’ll be required to provide about 20 percent down, and the number can go as high as 30 percent for an investment property. It’s also likely you’ll pay a higher interest rate on the loan if it isn’t a principal residence.
Carefully Consider Your Locale
Many dream destinations also happen to be in extreme climates. Ask yourself, how would you maintain the property during the year? Take, for example, a remote mountain home out west: How would it fare during winters? How would you prevent the pipes from freezing if nobody is home? If you did visit during the winter, how would you access the property?
It’s not just the cold, either. Let’s say you’re considering an out-of-state beach home. How would you handle tropical storm and hurricane preparations at a moment’s notice if needed? Is the property in a flood zone, which would require additional insurance? Does it have a large yard that would require frequent maintenance? Both extreme heat/humidity and extreme cold can also impact vehicles you might decide to keep at your second home.
If you’re undeterred by the elements, you’ll also need to hone in on the specifics of your desired location, just as you would with any other home purchase—perhaps even more so if you end up needing to sell quickly. That means partnering with a seasoned agent to analyze resale values, school zoning, property taxes, access to hospitals and health care, and even some surprising external factors that affect the desirability of certain neighborhoods.
While the high-level basics of any real estate transaction are the same, there’s room for improvisation with a second home.
For example, once you identify the perfect locale, you might try renting in the area to get a feel for it in each season of the year (properties that might be idyllic in summer could be brutal in winter, and vice versa; certain areas might also become overly crowded in some months of the year).
Live your life as you would if you owned—go to restaurants and see how long the waits are during the busy season; go to the grocery store and see how well-stocked it is in an off-season; see how everyday life plays out. In short, test the waters before you take the plunge. You can also consider different ways to split the cost of a second property. For instance, you could share ownership with a family member or friend.
A vacation home can certainly enrich your life and create a gathering place for friends and family for years and even generations to come. If you can meet the stricter scrutiny with assets to spare, you’re on your way to purchasing—and enjoying—a second home.