Photo: Laura James

How much money should you have before you buy a second home?

At least a 10% down payment (sometimes as much as 25%). A credit score of 620 or higher. A debt-to-income ratio of 43% or less. Enough savings to cover two to six months of mortgage payments (on both the first and second homes).

realestate.usnews.com - Should You Buy a Second Home? | Real Estate | U.S. News

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A second home can be a tempting premise. It can serve as a regular vacation spot, a source of extra income or just a much-needed respite from daily life. But second homes also come with costs and challenges, and they aren’t the right fit for everyone. Are you considering buying a second home? Here’s what to think about before you do.

The costs of a second home.

How to buy a second home.

Is a second home right for you?

Renting out your second home.

The Costs of a Second Home

Before you buy a second home, it’s important to understand the costs another property will come with. Upfront, there will be a down payment, which lenders say can range anywhere from 10% to 25% of your total loan amount, and there are closing costs, too. These averaged $6,905 per loan in 2021, according to ClosingCorp, a closing technology company. Once you own the home, you will also have a monthly mortgage payment, which varies based on your loan amount and interest rate. Generally speaking, interest rates on second homes tend to be higher than those on principal residences, as they pose more risk for lenders. Fannie Mae even requires a rate adjustment for second home borrowers to account for this extra risk. Depending on how large your down payment is, it can mean an interest rate anywhere from 1.125 to 4.125 percentage points higher than you’d get on a primary home loan. Getting preapproved with a mortgage lender can help you gauge what your rate and monthly payment may be. Once you know this number, you can evaluate how a second home would fit into your budget. “I like to suggest a test when someone is unsure and contemplating a second home,” says Lisa Culp Taylor, a real estate agent with Parks Realty in Franklin, Tennessee. “Take the money necessary to cover the mortgage on a second home, perhaps around $2,500, and for several months, put those funds toward your personal home mortgage. If this doesn’t stress the monthly budget, then go for it.” Keep in mind: The costs associated with your mortgage aren’t the only expenses you’ll incur. You will also have the added costs of repairing, maintaining and insuring the property, and there will be annual property taxes as well. Property taxes tend to be higher than on primary residences, because they're not eligible for homestead exemptions. These allow you to reduce your home’s taxable valuable – and thus, your annual tax burden. In Texas, for example, the homestead exemption lets you reduce your home’s taxable value by $40,000.

How to Buy a Second Home

The process for buying a second home is largely the same as it is for buying a primary residence. You’ll get preapproved for a mortgage loan, shop for the home and then put in an offer. Once the seller accepts, you will fill out your lender’s full application, submit your financial documentation, pay your down payment and closing costs and close on the loan. The big difference will be in the requirements you’ll need to meet to qualify for the mortgage.

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“A lender’s qualification requirements will likely be more substantial for financing a second home than a first,” says Shelby McDaniels, channel director for corporate home lending at Chase. “When applying for a mortgage for a second home, lenders may require borrowers to have higher credit scores, lower debt-to-income ratios, a larger down payment and extra funds in reserve.”

Second home borrowers can expect to need:

At least a 10% down payment (sometimes as much as 25%).

A credit score of 620 or higher.

A debt-to-income ratio of 43% or less.

Enough savings to cover two to six months of mortgage payments (on both the first and second homes). If you intend to rent the property out, your lender may consider it an investment property. These often come with even stricter requirements.

Is a Second Home Right for You?

If you have the financial resources and are confident you can qualify for a second home mortgage, then the next step is to consider how often you’d be able to make use of the home. Would your work allow you to visit frequently? Would your finances?

“Second homes can be a great idea for people who are retired or who have the ability to work remotely and float between their primary and secondary residences,” says Matt Schneid, mortgage sales manager at AmeriSave Mortgage. “It may not be worth it if you don’t have enough vacation or time to use the property.” As Schneid alluded, retirees can often see big benefits from second homes. Many use them to hop between climates – living somewhere warm in the winter and cooler in the summer. “A second home allows the owner to occupy the property for part of the year,” says Gabriel D'Pascuale, broker associate at RelatedISG Realty in Miami. “As such, these properties are right for people who want to vacation in a specific area every year or just get away from seasonal elements. In Florida, we find seasonal tourists called snowbirds escaping the cold winter weather up north every year between mid-October and March to second homes." If you fall into one of these categories – and determine you have the time and resources to utilize a second home – you should start considering where to purchase the property. Knowing how you plan to use the house can help here. “If people are going to invest in a second home they should have a plan to use it,” says Alyssa Sharpe, an agent with RE/MAX Results in Nisswa, Minnesota. “They need to consider how they are going to use the property and what the intended benefit will be.” If it’s meant to be a vacation getaway, for example, you’ll need to choose a location where you’ll enjoy going regularly. If you want to use the home as a getaway from the hustle and bustle of daily life, somewhere quiet and more remote might be better. Finally, have a logistical plan for the home. How will you maintain the properties? What will your processes be like for opening and closing up the home if in it’s a more seasonal area? If you’re not confident you’ll be at the home enough to handle these tasks, you might need to bring in a property manager or enlist a neighbor to ensure the home gets the attention it needs.

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“You may want to look into a local company to ensure that your home is protected when you are not there – either for maintenance or just general TLC,” says Bret Weinstein, founder and CEO of Guide Real Estate.

Renting Out Your Second Home

Renting out your second home can be a smart way to leverage the home when it’s not in use – and even cover your mortgage and other costs, too. Still, it does add some additional challenges. For one, you’ll need to consider its location more carefully. Not only will it need to be near a desirable destination, but you’ll also need to make sure the community allows for rentals. “Do a ton of due diligence,” Weinstein says. “Really get familiar with the area. Where are the amenities? Do they match up with your expectations of what you need on the second home? Is it actually rentable when you are not there, and how much should that rent be? Really vetting both the home and the neighborhood is vital.” You also need a plan for managing the property, finding and vetting renters, and handling the legal elements of it all – like drawing up the lease, for example. Unless you’re well-versed in these areas, you may want to bring in a pro for help. An attorney can put together an appropriate leasing contract, and a local real estate agent can likely assist with locating tenants and running background and financial checks. As for managing and maintaining the home, a property management company can help – but make sure you budget appropriately for them. According to real estate investing platform Roofstock, management companies typically charge around 8% to 12% of the monthly rent.