Buying a second home: what to consider

A primary residence is the main home you live in for the majority of the year. In contrast, a second home can serve as a vacation home, a retirement property, or another home if you frequently travel.

• A second home must be intended for personal use, and you must live in it for part of the year.
• Lenders may require you to occupy a second home for a specified period each year. Depending on their requirements, they may let you rent your second home to other tenants. 

Investment properties are purchased to generate passive income through residential or commercial renters. A property that you purchase solely for rental purposes cannot be considered a second home.

A second home can serve a variety of needs, depending on your personal goals or your specific situation. While a second home may not be for all homeowners, it’s important to think through your goals and be prepared before you purchase one.

• Vacation home – Having a second home may make sense if it’s located at a frequent vacation spot or somewhere you wish to put down roots. In some situations, a vacation home could serve as a primary residence after retirement.
• Work convenience – If you frequently travel for work, a second home could be more convenient for you, compared to renting or finding temporary housing each time you travel. 
• Real estate investment – Depending on your investment goals, you may wish to add property to diversify your portfolio. If this is something you’re interested in, be sure to understand whether your property would be deemed a second home or investment property, and what requirements will be in place.

Buying a second home is seen as a riskier venture for lenders, which means that the eligibility criteria you need to meet as a borrower will often be higher than it was for your primary residence. Some of the lending requirements may include:

• Larger down payment – Some loan types allow flexibility for choosing your preferred down payment amount, but lenders will often require a larger down payment for your second home. You can expect to put down 10% with a conventional loan or 20% with a jumbo loan.
• Higher credit score – Lenders have credit requirements when approving mortgages, and those requirements tend to be higher if this is your second home. Every lender has different credit score approval standards, so talk with your lender to learn more.
• Lower DTI – Lenders also evaluate your debt-to-income ratio (DTI), which compares your total monthly debt with your income. While lenders will likely look for a higher credit score when approving a second-home mortgage, a lower DTI is more favorable.
• If your credit score or DTI are not optimal, other factors could help put you in a more favorable light for lenders, such as having cash on hand for six months of expenses.

Buying a second home is a significant expense, but it may be worth pursuing if you have the financial means and it aligns with your overall goals. When considering whether to purchase a second home, you will want to be familiar with the upfront and ongoing costs to determine how it will affect your budget and overall finances.

Even if the cost of a second home fits within your budget, it may or may not make sense with your other personal or financial goals. As you evaluate whether or not a second home makes sense with your overall situation, you can ask the following questions to determine whether buying one is right for you.

• Know your mortgage options. Conventional and jumbo loans are commonly used for second homes – typically, conventional loans require a 10% minimum down payment, while jumbo loans require a higher 20% down payment. You can’t use government-sponsored loans, such as FHA or VA loans, for a second home.
• Get prequalified or preapproved. These preliminary steps in the mortgage process can help you anticipate what to expect before formally applying. Prequalification occurs early in the process and provides an estimated loan amount, while preapproval shows you have serious intent to make an offer.
• Be comfortable with your credit score and DTI. Among the various factors that influence pricing, lenders will evaluate your credit score and DTI, or the amount of debt you owe versus the amount of money you make.
• Work with a real estate agent. Before you look for second homes, partner with a local real estate agent who can provide additional insights for your ideal market. An agent can walk you through property tours and help you negotiate a fair purchase price.

If you’re a Wells Fargo customer, consider creating a new financial goal in LifeSync through the Wells Fargo mobile app  to track your progress toward a second home.