Why buying a second home is different than your first
Dreaming of a vacation home down on a beach? Or maybe a cozy little spot in the mountains? A second home can be a great escape as well as a good investment, but there are certain things you should know if you are looking to buy one. Because of your living situation and finances, lenders often view buying a second home differently than they do a primary home.
Over the last 12 months, there has been an uptick in second home purchases and home buying in popular vacation spots. More and more people are taking advantage of the greater flexibility remote work has afforded them. In fact, second homes make up 15% of homes sold now, up from 5.5% in 2018. So, you’re not alone in wanting your own private getaway.
What you should look for in a second home
You’re probably daydreaming about your vacation home already—where you want it to be, how you’ll decorate it, who’ll you invite to share the space with you. But before you can make these decisions, here are seven things to consider before you start looking:
1. The changing nature of second homes
Traditionally, owners of a second home might use the property only for vacations, staying for the weekend during the school year and longer stretches during the summer or holidays. But the changing realities of work and school are shifting use patterns for second homeowners, leading them to stay for weeks and months at a time.
Because of this, qualities like high-speed internet, home offices, and learning areas for children are important to keep in mind as you consider a second home.
2. Don’t rush your decision
You already own one home, and you should make sure you don’t rush through your research for your next home. Once you find a house at an affordable price, give yourself at least a 24-hour period to research it before committing any money towards it.
Location, view, features and other amenities determine whether a vacation home is a wise investment or a financial sinkhole. How well do you know the area? What are the taxes like in your new spot? If it’s near water, what’s happening with erosion near any structures?
We know those listings are tantalizing—but make sure you get your money’s worth.
3. This will become your go-to travel spot
For better or worse, your vacation home is where you’re likely going to be spending your vacation time. It might seem obvious, but if you’re the type of person (or family) who likes to see a different part of the world every year, a vacation home may end up cramping your style.
4. Can you go the distance?
Don’t underestimate the difference between a two-hour drive and an eight-hour drive. You’ll inevitably visit a relatively close relaxation spot much more often than a remote residence that requires much more time to get to.
5. Make sure to account for all the costs
Don’t bite off more than you can chew—in addition to a second mortgage payment, you’ll need to foot the bill for real estate taxes, homeowner insurance and ongoing repairs and maintenance.
Another issue with buying a second home that some people underestimate is taxes. Your mortgage interest from a second home may or may not be tax-deductible. Consult with a tax professional to find out what you should be expecting if you purchase a second home.
6. Work with a lender who knows the area
Local lenders will be comfortable with appraisals and lending in rural areas. Appraisals can be more difficult in rural areas, since it can often be hard to find comparable sales. Plus, a lender well-versed in the area can help you navigate local rules and policies.
7. You can’t put a price on uncluttered time with family and friends
If the last year has taught us anything, it’s that time with family is more important than ever. A second home can function as a calming retreat away from your day-to-day realities. Time away from your routine, in a beautiful locale (and maybe with spotty cell reception) could be just what you and your family need to unplug, reenergize and reconnect.
What your lender looks at for a second mortgage
People like vacation homes because they offer a chance to have a different day-to-day experience. But you should know that your lender will view your mortgage application differently, as well. Lenders take on more risk when providing loans for second homes and their requirements can be a little more stringent than you might remember from your first home.
Also, keep in mind that certain fees and expenses, like title fees, can vary state-by-state.
Minimum down payment requirements for second homes are usually higher than those for primary homes. For a conventional loan, the minimum down payment on a second home is usually about 10 percent, while the minimum for a jumbo loan will often require 20 percent down or more, depending on the lending requirements.
You’ll want to be sure you have enough savings to cover the down payment, as well as closing costs, the reserve requirements and other costs and fees associated with a home loan purchase.
Make sure you’ve got a clean bill of health when it comes to your credit. While a lender will pay close attention to all of your credit history, your mortgage payment history is particularly important. Also, when properly managing credit, you should know your credit rights, understand how to give your credit a checkup.
When purchasing a second home, your lender will want to see that you have a reasonable amount of money saved in your account(s), usually two months’ worth. Also know as reserves, they are the total monthly payment for your mortgage – this includes taxes, insurance and any homeowner’s fees.
Lenders will want to see that you have job stability. Job hopping or a recent change in career path can be a red flag when getting a mortgage. A lender will typically want to see a minimum of two years in the same industry; however, exceptions may be made so check with your lender.
While there is no hard and fast rule on how far your second home is from your primary residence, your lender will look at this and require that it is a “reasonable distance” from your primary residence. They are essentially trying to determine that this is, in fact, a second home and not an investment property.
Reasonable distance really is just a commonsense gut check. For example, if the home you’re trying to purchase is only a few miles from your primary residence, and is not located in a vacation home area, it’s unlikely to be considered a second home. However, if you live in the suburbs and are buying a condo in the city, that would likely be considered a second home.
The great short-term rental debate
In many destinations—especially beaches and ski resorts—it’s possible to earn substantial rental income on a second home. However, renting out your home can mean constant cleaning, dealing with booking sites, and an inconsistent customer flow. Plus, to earn top dollar, you’ll often need to open up your home to renters during peak season—the same time you’ll want to be there.
There’s also the important question of local laws that regulate how often you can rent out a residence. For example, New York City has strict laws about short term rentals, including that the owner must be present during a guest’s stay. And if your vacation home is part of a HOA or condo association, there might be rules about short term rentals as well.
A long-term investment in mental health
Vacations are a great way to de-stress, gain perspective and improve your overall mental health. Don’t let an investment in a vacation home undermine all of those benefits.
It’s a big commitment, not only financially, but also of your time and energy, especially if you choose to earn some extra income by renting it out. Don’t let this commitment add to your worries. That’s why we recommend doing your homework before you buy, so that you can kick your feet up at your new getaway knowing you’ve made the right decision.