Maybe you work very hard throughout the week and need a relaxation spot. Possibly you have completed a career, want to keep living where you are, but want an oasis to visit often. What if retirement is a few years off, but you want to go ahead and buy your final home to start enjoying it? Either way, buying a second home may be in the cards for you. Certainly, financing options are available including more flexible guidelines compared to earlier years. Thus, making a second or vacation home a reality.
Buying a Second Home
I think it is a safe bet that most have watched some or maybe even all of the HGTV shows like Beachfront Bargain Hunt, House Hunters, or Fixer Upper. Even if you haven’t, buying a second home is a dream for so many. For instance, if you’re looking for a place with a lot to do along with sun, world-class golf, and unbelievable seafood, Myrtle Beach is a very popular destination. Of course, there are other popular beaches like Virginia Beach or more quiet small beach towns such as Ocean Isle Beach, Holden Beach, or Sunset Beach.
Although, second homes aren’t just at the beach. Imagine vacationing in historic areas such as Charleston SC, Wilmington NC, or Norfolk VA. Of course, many also choose to live in these places full time because of the quality of life, weather, and things to do. Each day, we receive a lot of questions on buying a second home. Common questions include:
- What is the minimum down payment on a second home?
- Can I buy a second home that will eventually be my retirement home?
- Is flood insurance required?
- What are the second home mortgage options
What is the Down Payment Requirement on a Second Home Purchase?
A popular misconception when buying a second home or even a primary home is a purchase requires 20% down. Although buying a principal residence has more low to no down payment options such as VA, FHA, USDA, or conventional options, second home loan options are more vanilla, but just because there are not as many options on a second home purchase, it doesn’t mean a lower down payment is not available. As little as 10% of the purchase price could be allowed as down payment. An additional way of keeping out of pocket funds low would be to include seller paid costs for the buyer. When buying a second home and financing between 75.01 – 90% of the price, the seller is allowed to pay 6% of the sales towards the buyers closing costs and pre-paids. If the loan amount is 75% or less of the price, then the seller may pay 9% towards costs.
Down Payment Sources
With such a low down payment requirement, this makes owning a second home more obtainable. So, where can the money come from? Luckily, there are plenty of sources for funds to close.
- Bank accounts
- Retirement account withdrawal
- Retirement account loan
- Investment accounts
- Home equity loan/line on the primary
- Sale of another home or asset
- Gift funds (after minimum requirement met)
Do keep in mind to discuss these possible sources with your mortgage loan officer as there are requirements for documenting the fund’s source. Furthermore, one option may have advantages over another for each buyer’s scenario.
Can I buy a second home that will eventually be my retirement home?
This is a very popular request these days. Over the years, maybe you have vacationed somewhere and rented a place by the week. Then, the dream starts materializing that this could be a permanent vacation spot and owning a second home would be ideal! Enjoying the home while you can during the last few years of a career before possibly moving into the home as a permanent residence. Occasionally the question comes up, “Is it ok to buy as a second home and then convert to a primary residence down the road?” That is perfectly fine as long as the intention was to buy as secondary, it was used as a secondary, and eventually is converted down the road.
Assuming that a buyer could afford the two homes, this would be a great way to prepare for the enjoyment of a vacation property. Learn about the area, maybe vacation there, buy the home, enjoy using it, and once retired, really use it a lot!
Is Flood Insurance Required?
Often, buying a second home involves living close to water. It may be a lake, river, pond, waterway, or ocean. If this is the case, the structure may be in a flood hazard area. When this is the case, flood insurance is required. If you are considering a home with flood insurance, ask the seller for the following:
- Copy of existing flood policy
- Elevation certificate
With the above items, it helps the buyer’s lender and insurance company determine if the dwelling requires flood insurance. Additionally, if flood insurance is required, these could help get the quote. Either the elevation certificate or survey could also prove that the structure itself is not in the flood hazard area. Thus, flood insurance should not be required. Although, it still may be a good idea for the buyer to obtain flood insurance. Because the structure would not be in the hazard area, the flood insurance premium is much cheaper. Always consult with a knowledgeable insurance agent about options to insure your new purchase.
Second Home Mortgage Options
As mentioned early in this article, government loans like FHA, VA, and USDA are only for primary residences. However, Fannie Mae and Freddie Mac conventional loans plus jumbo loans allow second home financing. Plus, there are great advantages to using conventional loans these days. Therefore, making the qualification easier and the dream more obtainable. These advantages include:
- Flexible guidelines with student loan debt
- Low mortgage insurance rates for high scores
- Up to 50% debt ratio
- Condo financing
- Second home renovation loans – Learn more about renovation financing.
Conventional loans are limited to the county conforming loan limits, but that is where a jumbo loan comes in handy. Jumbo loans provide financing for luxury homes exceeding these county limits. An example includes financing 80% up to a $1,000,000 purchase price for second homes.