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How to Afford a Second Home

Written by Posted On Wednesday, 27 November 2019 10:48

If you are daydreaming about a second home in the mountains or at the beach, you may think that you will never have enough money to afford such a luxury purchase. 

Not all second homes are expensive but even if they are relatively affordable, your budget has to be able to handle extra monthly payments. It also includes property taxes, homeowners insurance, etc. 

You also need to think about routine maintenance, repairs and utility bills. However, it is not an unattainable goal and every cent you save can make a difference. 

Financing Options for a Vacation Home 

A cash purchase

The easiest way to buy a vacation home is by saving up enough cash. As it is not your principal residence, you can’t use a Federal Housing Administration (FHA) loan for the purchase. These loans are often the prime choice for home purchases due to the lowdown payment and the fact that even those with lower credit scores may qualify. 

Saving up enough cash for a second home can be quite daunting. However, there are many ways to end up with more cash in hand.

For instance, if you live in Houston, you can approach those who offer “we buy junk cars Houston” and sell those junk cars that are simply taking up space in your back yard. It may not be a huge payout, but every bit of cash in hand is a step closer to your dream. 

A home equity loan

If you doubt you’ll ever be able to save up enough cash, another option is a Home Equity Loan. This can work if you have enough equity in your principal residence. Many homeowners have lost equity due to dropping home values and having enough equity to purchase another home is quite rare. 

Lenders are also not as willing to approve a home equity loan out of concern that home values may continue to decline. They assume that if homeowners run into financial trouble, they are more likely to keep up with payments on their primary residence than on a second home. 

A conventional loan

You can take out a conventional loan to buy a second home but you will have to make a larger down payment, pay a higher interest rate and meet tighter conditions than for a mortgage on a principal residence. 

Many lenders want a minimum down payment of up to 30 or 35% for a second home. To qualify, you need to have a high credit score and a strong monthly debt-to-income ratio. You will need to fully document your income and assets so that lenders can see significant cash reserves and make sure you are able to handle the payments on two homes. 

Second homes often have a higher interest rate because lenders base pricing on risk and borrowers are more likely to default on a loan for a second home than one for a principal residence.

If you plan to rent out your second home for extra income, there are lenders who don’t allow rental income to be considered in order to qualify for the loan. Some allow a percentage of rental income to be considered and others require a documented history of consistent rentals. 

As you can see from the above, saving up enough cash is the best way to buy a second home. It may take a long time to save what you need and getting rid of many unwanted items may help to accelerate the process. However, it will be worth it in the end if you can make your dream a reality. 

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Velva Dunn

Armed with a college background in Marketing, Finance and Business Administration Velva quickly rose to the ranks of being in the Top 1% of all Realtors Nationally. She has represented clients ranging from first time home buyers and sellers to senior executives within top Forbes companies.  She has been instrumental in developing neighborhoods from selling land/lots to builders and buyers as well as, contributing her expertise and experience to the overall design of many of her clients' custom build homes. 

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