How do I qualify for a second home?

Who doesn’t dream of owning a vacation home or using a rental home as an investment property to supplement income? With mortgage rates at historic lows, now may be the right time to diversify your assets and invest in a second home. Homeowners hoping to purchase an investment property should consider taking advantage of the low mortgage rates and fees offered by online lenders.

To determine if this is the right opportunity for you to invest in a second home, you must first figure out whether you can qualify for a second home loan and if you can responsibly afford a second mortgage without impeding your other financial or lifestyle goals.

How do you qualify for a second home?

Although you may have secured a mortgage loan for your first home, that doesn’t mean you’re automatically qualified for a second home loan approval. There are a number of factors that a mortgage lender will consider before approving you for an additional loan, including:

• Credit score
• Debt-to-income ratio
• Down payment
• Cash reserves

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How do you know if you can afford a second home?

If you're unsure if you can responsibly afford a second home, ask yourself these three questions before making an offer:

1. How much money do you need to put down on a second home?
2. Do you have enough savings in reserve?
3. Can you accomplish your other financial goals while juggling a second mortgage?

1. How much money do you need to put down on a second home?

Depending on your credit score, debt-to-income ratio and the status of your first home mortgage loan, it’s likely that you’ll need a down payment of at least 10% to 20% on your second home.

2. Do you have enough savings in reserve?

Should an emergency occur, you’ll need to have adequate savings to deal with this unfortunate scenario without missing payments on either of your loans.

3. Can you accomplish your other financial goals while juggling a second mortgage?

A second property will involve expenses unrelated to the mortgage, such as repairs, HOA fees and renter maintenance costs.

You don’t have to schedule an appointment with a financial adviser to get an idea of the annual mortgage expense for a second home. Use an online mortgage calculator to instantly determine the potential monthly payments you’d take on after purchasing an investment property.

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Other ways to finance a second home

Purchasing a second home is a significant financial undertaking, even for those who are comfortably affording their current mortgage. If you’re unable to make an adequate down payment from your savings alone, you may want to consider one of these three ways to finance a second home purchase:

1. Use a cash-out refinance
2. Use your home’s equity via HELOC or home equity loans
3. Reverse mortgage

1. Use a cash-out refinance

A cash-out refinance turns the existing equity in your home into cash which you can use for anything, including the purchase of a second home. This mortgage refinance option could potentially help you secure a lower interest rate and additional tax deductions. However, the potential closing and private mortgage insurance (PMI) costs may uncomfortably stretch your finances.

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2. Use your home’s equity via HELOC or home equity loans

You may also utilize the existing equity in your home through a home equity loan or a home equity line of credit (HELOC). A home equity loan provides you with a lump sum that you can use to finance a second home, while a HELOC allows you to borrow against your home multiple times up to a certain limit. Both typically have low interest rates, though both are also secured to your property, which means you could lose your home if you default on either.

Depending on the equity in your loan, affording an investment property may not be out of reach. Use an online mortgage refinance calculator to help determine your monthly costs.

3. Reverse mortgage

If you’re over 61 years old or have already paid off your home’s mortgage in full, you could consider using a reverse mortgage. This involves the lender paying you using the equity in your home. You will not need to repay this debt until you leave or sell your home.

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