So, you’ve mastered the art of buying your first home, but what comes next? As a homeowner, you might be thinking about purchasing a new home or making an investment property purchase.
With that thought process in mind, we’ve compiled a list of questions that move-up buyers ask before they make a second purchase.
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.
What mortgage options are available for move-up buyers?
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 move-up purchase?
A popular misconception 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 aren’t as many options for a secondary residence, it doesn’t mean a lower down payment is not available. As little as 10% of the purchase price could be allowed as a 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.
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 an additional home to use as a vacation or retirement property?
Maybe you’ve vacationed somewhere and rented a place by the week. Then, the dream starts materializing that this could be a permanent vacation spot, and owning another 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 a 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!
If you’re dreaming about your “forever home,” contact an OVM loan officer to build a personalized mortgage plan. A mortgage plan will serve as your roadmap to go from first-time homeowner to move-up buyer in no time.
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