How to Buy a Second Home With Low Down Payment

Many dream of buying a second home. Whether the goal is to get away to relax or play, it is more possible than ever. Along with the combination of great interest rates and loan programs, more are able to make it happen. Another key 2nd home strategy includes using vacation rental income to make your dream vacation home a reality. So, I’m going to show you how to buy a vacation home with 10% down and even less of your own money!

I was asked recently, “Do you have any decent programs for second home buyers?” and the quick answer is “Yes, there are a lot of strategies to make this happen.”. These financing options include purchase loans on the 2nd home itself, refinancing a primary or other residence to pay cash on the new home, or both. Fortunately, we have the programs to make it happen too!

Is Buying a Second Home a Good Investment?

If you have watched HGTV at all, you will see some amazing dream vacation property purchases. Additionally, there’s even a show that helps buyers purchase a second home and get rental income to cover most or all of the mortgage payment. Now, that gets viewers attention! So, is this possible? Maybe… Basically, it comes down to a few key areas:

  • First, is do you love it and will you use it (This is a must or why buy?)
  • Rentability – Is it desirable & will it have a solid rent flow?
  • Financing strategy – Low down payment, getting the funds, etc
  • Mortgage payment including taxes, insurance, and HOA dues
  • Maintenance costs

Can I Rent It and Finance as Second Home?

Yes, to a point! First of all, there is a difference in second home and rental property financing. Rental properties require more down payment and a little higher interest rates. Now, this does not mean everyone should call a property a second home when it will really be rented right away full time. That would be fraud and we want to keep you away from that.

Second Home With Rental Income Rules

But, buyers who will occupy the home at least 2 weeks out of the year may also use the property as a vacation rental income producer. That’s right, enjoy the home yourself and use others to help pay for it! The beauty of it is that you get the better terms of a second home, while enjoying rental income. The key is that we may not use the rental income to qualify the buyer. If rental income is needed to purchase the property, then it must be considered a rental property purchase. Which is cool too because we have programs to help buy investment properties as well.

So, you may be thinking – What are my financing options to make this happen? Well, let’s check it out these options!

Second Home Mortgage Solutions

  • Single family or town home purchase with 10% down payment
  • Condo purchase with 10% down payment
  • Veterans cash out up to 90% of primary residence appraised value
  • Conventional & FHA cash out up to 80% of primary residence appraised value (New rules effective 9/1/2019)
  • Home equity line of credit on primary residence for cash out
  • Veterans can purchase additional primary residence in another state!
  • Gift down payment
  • Purchase renovation loan – Fannie Mae HomeStyle Renovation Loan

2nd Home Purchase Only 10% Down Payment

When purchasing a 2nd or vacation home, we have the ability to lend up to 90% of the purchase price. Many believe that 20% is required on primary residences. Even more think 20% down is required on vacation homes. But no, it can be 10% down. Because the loan is over 80%, there would be PMI required. Of course, we have several PMI options to best fit a buyer’s scenario and goals. Additionally, in some states it could be possible to combine a first mortgage and a home equity line on the second home to avoid PMI.

As far as where the down payment may come from, there are several options. Such down payment sources may include checking, savings, retirement account withdrawals or loans, home equity loans, home equity line of credit, or the sale of an asset such as a car or investments. Further down we even talk about gift funds!

10% Down Payment Condo Purchase

Buying a condo has its privileges of carefree living. Just like a traditional home or town home, it is possible to purchase a condo as a vacation home with as little as 10% down! In order to finance a condo purchase, the condo must be approved by meeting certain industry standards. So, we would request items such as a completed condo questionnaire, declarations and bylaws, proof of all insurances, and a copy of the current budget of the association. 

Although, a limited condo review is possible with 25% down payment which doesn’t require most of the condo items mentioned above. As you will see further down in this article, there are several options to obtain the down payment rather than out of a savings account.

VA Cash Out Refinance on Primary

A little known option through VA is to be able to refinance up to 90% of the appraised value of the home. These funds may be used to pay off the existing mortgage, consolidate debts, or receive cash out for many reasons. In this article, we are discussing the purchase of a 2nd home and that is allowed. With sufficient equity, the cash out from the VA refinance could either be used to fully purchase the second home in cash with no loan needed on the additional residence or get enough cash out for the down payment on the new home. Then, we would use a conventional loan as the primary mortgage on the new property.

Conventional or FHA Cash out Refinance

Fannie Mae and Freddie Mac conventional loans will allow a refinance with cash out towards a down payment. Guidelines allow up to 80% of the appraised value on a primary residence or 75% on an investment property.  Therefore, the cash out could be used towards the down payment on the 2nd home. Furthermore, if there is enough equity available, the cash could be used to fully purchase the 2nd home.

Additionally, an FHA cash out refinance could be an option for refinancing a primary residence. Although, typically a qualified 2nd home buyer would probably be better served by a conventional cash out refinance.

Use a HELOC for a Vacation Home Down Payment

Let’s say you have a really low interest rate on your primary residence mortgage and you don’t want to touch it. No problem, let’s look at a home equity line of credit (HELOC) or a fixed rate second mortgage. Either may provide funds to use as a down payment on the additional home. There are several key advantages to a HELOC: Keeping the first mortgage in place, interest only minimum payments, and having access to a line of credit as it is paid down.

Another advantage is that a buyer considering the use of retirement funds could avoid potential income taxes. If someone withdraws funds from retirement for down payment, there could be income taxes and possibly a 10% penalty. So, a home equity line of credit could save taxes in this area.

Veterans Can Buy a Primary Home in Another Area

That’s right! Most do not realize this (including lenders), but it is possible to buy a second home with a VA loan. Now, this is not quite like we are talking above as a vacation property. But, if a Veteran lives in a house in a certain state and he/she wants to buy another house in another state, it may be counted as a primary residence. That means 100% financing! But, there are rules and the main one is that someone needs to occupy the new property as a primary residence. But, the other person can occupy a different residence most of the year. How about that? Want to learn more about this strategy? Read this popular article to see some solutions we have provided in this area.

Gift Down Payment for a 2nd Home

That’s right, a gift from an allowed source is allowed for a portion of the down payment on a vacation home. As mentioned above, the required minimum down payment is 10%. But, 5% of the price may be a documented gift. So, that means it is possible to purchase a get way for only 5% of your own funds! That’ is pretty cool!

Vacation Home Purchase Renovation Loan

Many only think of renovation loans for primary residences. Yet, we do offer the Fannie Mae HomeStyle Renovation loan. A huge benefit is that this program will allow financing of home improvements along with the purchase price. Basically, add the purchase price plus the renovation costs, then take 10% of that for your down payment.

Advantages of Using Primary Residence Equity to Buy a 2nd Property

Remember, it doesn’t have to be all about the new vacation property. Some of the strategies we have discussed involve the primary residence. There are advantages to do this. For instance, use the primary residence to pay cash for an additional property that is in disrepair or tough to finance. In this case, the condition does not matter because it is not the collateral for the loan. Learn more about appraisal requirements

Talk about “tough to finance properties”. Buying a property such as nonwarrantable condos, condotels, geohomes, dome homes, singlewides, and more can be problematic. So, using the primary may take away these issues.

Adding onto this, it would be beneficial to receive extra cash from the primary residence refinance to renovate the new home. Plus, if the buyer starts the refinance early enough, he/she could be a cash buyer. Cash buyers have an advantage when it comes to making an offer on a home.

Interested in buying your dream getaway? Let’s have a conversation to determine which strategies help you now. Just complete a contact us form, complete an online application, or give us a call.

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Written By: Russell Smith

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