How to Buy a Second House: Tips for a Smart Purchase

Buying a second home can represent a dream fulfilled—a cozy retreat by the mountains, a beachfront bungalow, or an investment property that pays for itself. Whatever your motivation, the decision is far from a whimsical one. A second home purchase is a balancing act that requires careful planning of the financial implications and location strategy. But fret not—this guide will simplify every step of the process for you.

Why Buy a Second Home?

People buy second homes for a variety of reasons. Some envision it as a peaceful vacation retreat for family getaways. Others view it as a lucrative investment—a rental that generates a steady income stream. Maybe it’s for a future retirement plan, buying a place to live a slower-paced lifestyle when the time comes. 

Another common reason is purchasing a second home for a family member, such as keeping parents nearby or providing accommodation for college students. Whatever the purpose, the goals remain the same: maximizing home value while minimizing hassles.

But before you sign on the dotted line for your second property, you’ll need to put your financial house in order. After all, a second home is a second commitment to paying property taxes, maintenance bills, and potentially a monthly mortgage payment.

1. Assess Your Financial Readiness

Spoiler alert: Buying a second home requires more financial legwork than your first purchase. If you’ve already navigated the mortgage and funding process for your first home, you’re familiar with the basics. As a reminder, you’ll evaluate your readiness by looking at:

Mortgage

Most buyers finance their second home purchase using a mortgage or loan. This requires a down payment and proof of income. Because it’s a second home, lenders see it as an investment property and will want a larger down payment. That could be 25-30% of the loan-to-value.

Not sure you have that much available for a down payment? Consider using a home equity loan or home equity line of credit (HELOC) if you have enough equity built up in your primary residence. Interest rates for home equity loans and lines of credit are relatively low compared to personal loans and credit cards, making them a financially advantageous option to fund purchasing an investment property or vacation home.

You may be relying on rental income to pay some or all of the mortgage payments. But what if your financial situation changes or the rental property doesn’t generate the income you projected? Can your financial footing handle the extra payment?

Taxes

Owning two properties means double the property tax responsibilities. Research local and state taxes for your second home location. Some have higher rates on second homes. You may even want to see how the tax picture changes by which property you designate as your primary home. Some states do have residency rules to claim a property tax deduction.

Maintenance costs 

Along with taxes, owning a second home also means taking on additional maintenance costs such as insurance, utilities, and potential repairs or renovations. Rental property may have even higher maintenance costs, particularly short-term rentals, as the property will need to be cleaned after every tenant departs. 

Carefully assess your financial readiness before diving into buying a second home. Consult with a financial advisor to ensure you have a solid understanding of the costs involved and how they will impact your overall financial situation.

2. Determine Your Budget

Like any major purchase, setting a budget prevents overextending yourself and sets realistic expectations when buying a second home. This should include not only the cost of the property itself but also ongoing expenses such as homeowner association fees, property maintenance, and taxes. Be realistic about what you can afford and avoid overextending yourself financially.

Additionally, consider other potential sources of income for your second home, such as rental income or tax deductions for investment properties. Under IRS guidelines, mortgage interest paid on a second residence may be deductible, which can help offset some of the costs of owning a second home. 

You could use depreciation and deduct some expenses if it’s an investment property. Understanding these guidelines is crucial, especially if the property is used for investment or rental purposes. Consult with a tax professional to understand how a second property changes the tax picture.

3. Financing a Second-Home Mortgage

If you have the resources to buy a second home in all cash, skip the next steps. Otherwise, the home purchase requires some financing, mortgage options may be more limited when buying a second home.

Your financing options include:

• Getting a home equity loan from your primary residence
• A home equity line of credit (HELOC) again using the equity on your primary home
• Apply for a vacation home or second home loan from a private lender
• Apply for an investment property loan from a private lender

These loans can be conventional loans or adjustable rate (ARM) loans. Since this is a second home, the interest rates often run higher than those for a primary residence purchase. A mortgage broker can work with you to find the best deal.

The actual application process will be just like shopping for your primary home loan. You’ll want to shop around the mortgage terms, narrow down which broker you want to work with, and get a pre-approval letter to help set a budget.

Government-backed loans like VA loans or FHA loans do not finance secondary residences. They are limited to primary home purchases only.

Qualifying for a loan

Many lenders view second homes as riskier investments. To mitigate this risk, lenders have stricter mortgage requirements, such as higher credit scores, lower debt-to-income ratios, and larger down payments. 

Second home mortgage requirements

To qualify for a second home mortgage, you’ll typically need to meet the following requirements:

• A minimum credit score of 620
• A debt-to-income ratio of 36% or less
• A down payment of 10% to 20% of the purchase price
• A stable income and employment history
• A low loan-to-value (LTV) ratio, which is the percentage of the home’s value that you’re borrowing
• Additional cash reserves of two to six months

Besides the financial requirements for the borrower, the lender’s requirements may also extend to the type of vacation home purchases. These mortgage terms can specify:

• A specific distance from the primary residence
• Be a one-unit single-family home
• Be habitable year-round with heating and cooling (even if you don’t plan to use it all seasons)
• Not be handled by a property management company
• You are the sole owner of the property (no timeshares or co-ownership with family members)
• Not a full-time rental

Financing investment property

These figures change a bit if you plan to use the second property as an investment property and will rent it more than you use it or rent it full-time.

• A minimum credit score of 700
• A debt-to-income ratio of 36% or less
• A down payment of 15% to 25% of the purchase price

Differences between mortgages on primary residences and second homes

Mortgages on primary residences and second homes have some key differences:

• Down Payment: Loans on primary residences can require a lower down payment, such as 5% to 10%, while second homes typically require a higher down payment of 10% to 20%.
• Interest Rates: Second homes often have higher mortgage interest rates than primary residence mortgages.
• Loan Terms: Second-home mortgages may have shorter loan terms, such as 15 or 20 years, while primary residence mortgages can have longer loan terms, such as 30 years.
• Property Taxes: Second-home mortgages may require paying property taxes upfront, while primary residence mortgages often allow you to roll property taxes into your monthly mortgage payment.

4. Research Locations

Location is key when buying a second home. What type of property are you looking for? A weekend getaway that’s easy to get to for the whole family? A wintertime home someplace sunny and warm where you can enjoy outdoor recreation and not plowing snow? Research different areas that fit your criteria. 

“My parents owned cottages in Colon, MI, when we were living in a southwest suburb of Chicago,” recalls Kurt Uhlur, Chief Marketing Officer of ezhomeSearch. “My parents’ friends knew they were always welcome and that we would be in Colon almost every other weekend. We always had friends either coming with us or borrowing the cottage when we were not there. It allowed our local community to stay together.”

Weigh factors like distance to daily amenities, the recreation you enjoy, and potential rental income. Consider how the location of a second property can complement your primary residence, such as for commuting or as a vacation retreat.

Additionally, look into the local real estate market and how it may impact your investment. Is the area popular with tourists? Are there plans for development or infrastructure improvements? These factors can affect your second home’s short-term and long-term value.

5. Get Familiar With Local Laws, Regulations, and Tax Implications

Like with any real estate purchase, be aware of local laws and regulations that may impact your second home. This includes zoning laws, rental restrictions, and potential taxes or fees. For instance, if you plan to rent the property short-term, not all cities and counties allow this. If they do, some require special fees and permits. Some condo associations limit the number of rental units in a complex or the length of the rental term.

Consult with a local real estate agent or attorney familiar with the area to ensure you have all the necessary information before purchasing. 

While you’re at it, talk to a tax professional to navigate the tax rules and implications for second homes. Mortgage interest can be tax deductible, but only if you don’t rent the property more than 14 days per year. Additionally, the total loan limit for interest deductions is $750,000–that’s your primary residence and second residence loans added together.

Rental homes have different tax implications. For instance, the mortgage interest is fully deductible. Additionally, there is a process called depreciation that lowers the cost basis of the purchase. The taxpayer can also write off expenses related to operating the rental property.

6. Working with a Real Estate Agent

Hiring a local real estate agent helps find and purchase a second home. A good agent can help you navigate the local market, locate the right property for your needs, and negotiate a fair price. In some areas, experts specialize in vacation home real estate. Their insights blend what the market offers with your goals.

Hire a trusted real estate agent

When hiring a real estate agent, look for someone who:

• Has experience working with second home buyers who don’t live in the area
• Is familiar with the local market and can provide valuable insights
• Has a strong network of contacts and can help you find off-market properties
• Is responsive and communicative and can keep you updated throughout the buying process

Some questions to ask a potential real estate agent include:

• What experience do you have working with second-home buyers?
• What do you know about the local market, and how can you help me find the right property?
• What is your communication style, and how will you keep me updated throughout the buying process?
• What is your strategy for negotiating a fair price, and how will you advocate for me in the buying process?

Working with a trusted real estate agent leads to a smooth and successful second-home buying experience.

7. Consider Property Management

Hiring a property management company might make sense if you plan to rent the secondary residence. They help alleviate some of the challenges of being a long-distance landlord. The company acts as the boots on the ground if tenant issues arise. 

Property management companies may offer full-service, including marketing and booking your property. They can also set the booking rate to align with local market rates and handle property turnover. The property manager is the first point of contact during the rental stay.

Understanding the accounting and tax implications of managing rental properties is crucial. Different tax rules apply to second homes classified as investment or rental properties. Keeping all receipts and accounting of income and expenses matters for your financial liability. The company can provide valuable insight into the local market and regulations.

Even if you don’t rent the property, the company can do regular checks on your behalf to verify no issues have cropped up in your absence. That includes deterring squatters, checking for burst pipes after a freeze, or surveying for any damage from a storm.

8. Purchase a Vacation Home

Now that you have a real estate agent and narrowed down a location for buying a second home, the process will be like buying your first home. Review existing property for sale online and through your agent’s recommendations. 

If it makes sense based on your schedule and location, tour properties and different neighborhoods. Get a feel for what’s typical in the area, the neighborhood, and the amenities. Ask about additional costs, like homeowner’s association fees or condo fees. 

Once you’ve found the right property, partner with your real estate agent to extend a purchase offer. Then, get the preapproval letter from your mortgage lender to prove your ability to buy a second home.

You’ll have your due diligence period, during which a home inspector will visually assess the property for defects and areas of concern. The appraiser will then confirm the property’s value for the buyer and their mortgage lender. A title company verifies the property is free of liens or other encumbrances.

The final step will be to close the property on time. You’ll transfer down payment funds, sign any financing documents, and transfer the deed into your name. Now, the property is officially yours! 

Find Your Perfect Second Home

Buying a second home is super exciting, but it’s worth planning it out. Start by talking through the big picture with a financial advisor to check your finances are in good shape, set a budget, and check out a few different locations. Don’t forget to look into the local laws and regulations, and take a moment to think about what kind of property will really work best for you. You might consider buying a vacation home for leisure, investment, or retirement purposes, each of which comes with different considerations.