A Guide to Taking Out a Second Home Mortgage

If you’re currently a homeowner, taking out a second home mortgage can allow you to secure funding to invest in another property on top of your primary residence.

Taking out a second mortgage loan can be helpful for some homeowners, but a second mortgage is different from a conventional mortgage loan in some ways.

If you’re thinking about taking out a second mortgage or wondering when to refinance on your primary mortgage, check out this guide to learn more about taking out a second home mortgage.

• Why Buy a Second Home?
• Second Home Mortgage vs. Primary Mortgages
• Second Home Mortgage Requirements
• How to Take Out a Second Mortgage
• Final Notes

Why Buy a Second Home?

As a homeowner, buying a second home can offer several benefits. For example, you may consider purchasing a second home to use as a rental property, which can net you consistent cash flow each month. If you don’t want to rent your second home out all the time, you can purchase a vacation home that you can rent out through vacation rental services like Airbnb. As far as investments go, purchasing a second home can potentially be a good way to earn money through appreciation.

You might also consider purchasing a second home as a secondary residence, or as a vacation home for you and your family. Getting a vacation home now—perhaps even one that doubles as a seasonal rental—may be a good choice as the market gets more competitive. This is illustrated by the fact that between 2019 and 2020, vacation home sales rose by 16%. 

As long as you have the money to put a down payment on a second home and make your monthly mortgage payments, a secondary residence can be a good source of income or a great place to spend some of your time.

Second Home Mortgages vs. Primary Mortgages

One important thing to consider is that second home mortgages are a bit different than primary mortgages. Second home mortgage rates may be a little different than your primary mortgage rate, and second home mortgage requirements are generally more stringent.

It should come as no surprise if you have a difficult time securing a second mortgage loan. It’s not uncommon for lenders to tighten requirements a bit when you’re applying for a second mortgage. After all, the people lending you money want to be sure you can afford to make your mortgage payments. In some cases, this also means that second home mortgages may come with higher down payments, which can be a barrier to entry for some home buyers.

When you take out a second home mortgage, the interest rate on that mortgage may also be higher than the interest on your primary mortgage. These varying interest rates are a common obstacle when buying a second home, which is why it’s important to make sure you have a solid credit score and are in a good position to purchase a home.

You should also keep in mind that getting approved for a second home mortgage is generally more difficult across the board. When you apply for your first mortgage loan, lenders look at whether or not you can afford to make monthly mortgage payments while buying groceries and paying other bills. When you’re applying for a second mortgage, lenders are looking for that same type of income, plus you’re expected to have the income to keep up with payments on your primary residence. Because of this, many lenders are stricter when it comes to applying for a second mortgage.

Second Home Mortgage Requirements

While the general process is the same, applying for a second mortgage is a bit different than applying for a primary mortgage. You need to think about the fact that lenders look for different requirements when you’re applying for a second home mortgage, and those requirements may vary depending on what kind of home you want to purchase.

In addition to having the credit score to buy a house, lenders will also typically require 2-6 months of reserves when you’re applying for a second mortgage. This means that you must have enough money in the bank to pay your mortgage for 2-6 months in the event of an emergency. This includes enough money to pay the mortgage for both homes, with less-qualified applicants typically needing more reserves.

Another thing to consider is the fact that lenders may have different requirements for borrowers depending on the type of property you’re thinking about buying. Lenders are going to look at a second mortgage for a secondary residence or vacation home differently than a second mortgage for an investment property.

If you’re considering investing in a vacation home, you need to make sure the property you buy qualifies. In order for a property to qualify as a second or vacation home, there’s a list of basic criteria the property generally has to meet:

The owner must live in the home for at least 14 days per year 

The home consists of a single-unit that can be used year-round

The property isn’t being rented or overseen by a property management firm

The property belongs entirely to the buyer

How to Take Out a Second Mortgage

Taking out a second home mortgage is as simple as following a few basic steps as long as you qualify. You can get pre-approved and even use a second home mortgage calculator to make things a little easier. If you want to take out a second home mortgage, here’s how it works.

Get Pre-Approved

The first step to taking out a second mortgage is getting pre-approved for a loan. Getting pre-approved gives you an idea of your budget so you can shop for a home that you can afford. You might consider comparing rates with different mortgage lenders if you want to lower your mortgage payment and interest rates.

In order to get pre-approved for a loan, you’ll need to make sure you meet the typical qualifications for a second mortgage. This means having the required amount of reserves and making sure your credit score is good, which can take some time. You can skip some of the second home mortgage requirements, such as debt-to-income ratio, by putting more money down or having a good credit score.

Find a Home

Once you’re pre-approved, it’s time to start shopping for a home that’s within your budget. Your pre-approval will give you a good idea of how much you can spend on a home, and you can use a mortgage calculator to get an estimate of how much you’ll have to pay each month. Remember that shopping for a home is a big decision, so this part of the process may take a little longer.

When you’re looking for the right home, consider what you want to use your home for. You might want something a little larger if you plan on having family gatherings at your new vacation home, or maybe you want something small and quaint for your family’s yearly vacation. Shop around a bit and you may be able to find the perfect home in your price range.

Make an Offer

The next step in the process is making an offer on the home you want to buy. This is a major step because once you make an offer you’re only a few quick steps away from purchasing your new home. If you’re working with a real estate agent, they can help you make an offer that increases your odds of getting the house without spending too much.

Keep in mind that it may take a while for your offer to be accepted, especially if you make one of the first offers on a home. This doesn’t necessarily mean that your offer has been or will be rejected, so try to be patient.

Close on Your Second Home

Last but not least, it’s time to close on your second home. This is where ownership of the home is transferred to you, and you become the proud owner of a vacation or rental property. During this process, you’ll have to pay closing costs (if applicable), lock in your interest rate with your mortgage lender, and perform a final walk-through of the home.

The closing process also involves a lot of paperwork, some of which you might find hard to understand. If you want to learn more about this paperwork, including what you’re signing and why you’re signing it, you can always consult a real estate attorney. At the very least, you should look through this paperwork to make sure the interest rate and other important numbers are correct throughout each document you’re signing.

Final Notes

Taking out a second home mortgage may seem a bit overwhelming, but it’s not too hard as long as you know the basics. The most important thing you can do if you’re considering buying a second home is make sure you meet the requirements for a second mortgage.

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