Buying a second home is a dream for many, but it may be much more within reach than you think.
At OVM Financial, we receive many questions on this topic. Some of the most common queries we hear include:
- What’s the difference between 2nd home and investment property?
- What are my second home mortgage options?
- 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?
So, what is the difference between a second home and an investment property?
Because the use of a property dictates your financing options, it is important to note the difference between a second home and a rental property. A second home is an additional property that you buy to live in, even if it’s only for part of the year. To truly be considered a second home, it must also be some distance from your primary residence (the distance can vary depending on your lender).
An investment property is one that you have purchased to generate income. This may be in the form of a rental or a property you intend to flip. While you could live in this property for a portion of the year, any home rented out for more than 180 days of each year is typically considered an investment property. Loan options for this type of property will typically require more money down than a second home.
Buying A Second Home: Mortgage Options
Government loans like FHA, VA, and USDA are reserved only for primary residences. However, Fannie Mae and Freddie Mac conventional loans allow second home financing. There are great advantages to using conventional loans these days in making the qualification easier and a second home more attainable. These advantages include:
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 that all purchases require 20% down. While buying a primary residence has more low- to no-down payment options (such as VA, FHA, USDA or conventional options), second home loan options are a bit more limited.
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, as is typical with a conventional 30 year loan (though at this amount down, it is likely that a buyer will need to pay mortgage insurance.)
An additional way of keeping out-of-pocket funds low would be to include seller paid costs for the buyer. Here is a quick chart that will help you determine the amount of closing costs that can be covered by the seller based on the financing amount.
|Financing amount:||Seller can pay x toward closing cost:|
|75.01 - 90%||6%|
Down Payment Sources
With such a low down payment requirement, a second home is much more attainable. 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
Be sure to discuss these possible sources and options with your Loan Officer. He or she will be able to help determine what sources will best suit your situation, the regulations that may be in effect for each, and what documentation you will need to provide.
Can I buy a second home that will eventually be my retirement home?
This is a very popular request. 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!
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 residence, actually using the property as a secondary residence, and then eventually converting 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, vacation there, buy a home in the area, enjoy using it, and, once retired, really use it a lot!
Is Flood Insurance Required?
It is always smart to know the flood zone your new property will be located in to determine whether or not flood insurance will be required or recommended. FEMA provides a searchable map to allow you to determine your zone, which can be found here.
If you are considering purchasing a home with flood insurance, ask the seller for the following:
- Copy of existing flood policy
- Elevation certificate
With the above items, 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.
There are certainly options available to those looking to buy a second home, and this is a more attainable goal than many would think!
If you are looking to find a more permanent dream vacation getaway, contact an OVM loan officer today to learn about your options.