Financing a second home or investment property: what to expect
If you got a mortgage on your primary residence (the house you live in), you might expect the same interest rates or loan offers on your secondary residence.
But that's not often the case.
Whether you are buying a vacation home or an investment property, you will typically pay higher mortgage rates and may need to meet stricter guidelines to qualify.
This is what you can expect when applying for a mortgage on a second home or investment property.
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Second home mortgage rates versus investment property mortgage rates
The mortgage rates for second homes and investment properties are higher than for the home in which you live.
In general, investment property rates are approximately 0.5% to 0.75% above market rates. For a second home or vacation rental, they are only slightly higher than the price you would qualify for for a primary residence.
Mortgage rates for second homes: Typically less than 0.50% higher than your primary residence rateMortgage rates for investment properties: About 0.50% to 0.75% higher than your main home price
Of course, investment property and second home mortgage rates are still dependent on the same factors as first home mortgage rates. Yours will depend on the market, your income, your creditworthiness, your location, and other factors.
If your financial situation has changed since you bought your first home, your new mortgage rate may fluctuate more than average.
Mortgage rates and rules for second homes
Here's what you need to know about mortgage rates and second home requirements when looking to buy a property Vacation home: one where you live part of the year but not full time.
Occupancy: Part-time occupancy required
Lenders expect a vacation home or second home to be used by you, your family, and friends for at least part of the year. However, you are often allowed to earn rental income on the house when you are not using it. The rules for rental income vary depending on the lender.
Second home interest: slightly above market
A second home is not a primary home, so lenders see higher risk and charge higher interest rates. But nowhere near as high as investment property rates.
Down payment: usually 10% or more
Some lenders want 10% on a vacation home. And if your application isn't that strong (e.g. you have lower creditworthiness or lower cash reserves) you may need to drop 20% or more.
Credit Score: 640 or higher
Buying a second home or vacation home requires a higher credit rating, typically in the 640 range or higher. Lenders will also be looking for less debt and more affordability – which means a closer debt-to-income ratio. Strong reserves (additional funds after graduation) are also of great help.
Mortgage rates and investment property rules
Here's What You Should Know About Mortgage Rules When You Have One Investment property: One that you don't even live in and that you want to rent out all year round.
Occupancy: not required
If you are investing your own home and planning to rent it out full-time, you are under no obligation to personally inhabit the building for long periods of time.
Lending rates for investment properties: 0.50% to 0.75% above the market
Mortgage rates are considerably higher for investment properties. Often times, your interest rate on investment property will be 0.5% to 0.75% higher than if you were to buy the same house as your primary residence.
Down payment: 15% to 25%
Down payment requirements for an investment property range from 15% for a one-unit property to 25% for a two to four-unit property. Depending on your application and the type of loan you qualify for, you may also need to pay a larger deposit.
Private lenders – sometimes called "hard money" lenders – can also provide asset-based loans. The borrower pays 30% or 40% of the purchase price and the lender provides the balance.
Pinball machines frequently use such short term mortgage loans to fund their businesses. However, this can be risky. If the property is not sold enough to meet the loan amount, or if the property is not sold at all, the borrower can face foreclosure and loss of all equity.
Credit Score: 640 or higher
Lenders generally require borrowers to have a credit rating greater than 640 for an investment home loan. However, with low credit scores, the rates can be very high. Hopefully your score is 680 to 700 or more before you consider investing in real estate.
For comparison: primary home mortgages
When discussing second home and investment property mortgages, rates and rules are measured against those for primary homes. To give you a clear idea of what these benchmarks are, here are the typical home mortgage lending rules:
Borrowers can purchase real estate with one to four units through residential financing, provided they live in one of these units.
> Related: Guide to the types of home loans
As a rule, the apartment must be occupied within 60 days of closing. In the event of marriage, both spouses must live in the property. The property can be a single-family home or part of an apartment building such as a condominium.
Interest rates: standard market interest rates
Due to the low risk of home financing, mortgage rates are low compared to vacation homes and investment properties. Market prices advertised by banks and lenders are for primary residences.
Down payment: from zero percent
Home borrowers can finance with no-deduction for VA-qualified borrowers, 3.5% less for FHA mortgages, 5% less for compliant finance, and 3% less for the Freddie Mac Home Possible program or Fannie Mae HomeReady mortgage.
Credit points: 500–620
You can finance a main residence with significantly lower loans than an investment or holiday property. FHA loans allow credit scores as low as 500 (with 10% less) or 580 (with 3.5% less). And most lenders allow credit scores from 620.
Why interest rates and loan options are different on second mortgages
The apartment in which you live (your "main residence") is considered to be the lowest risk form of real estate. It is probably the only bill homeowners will pay during troubled times. A holiday home or investment property, on the other hand, is riskier. Borrowers are much more likely to forego these payments when money is tight.
Due to the higher risk of second homes, stricter rules apply to financing.
As shown above, these rules include above-market interest rates, higher down payments, higher creditworthiness, and more.
Of course, depending on the lender and mortgage program, borrowers will find different lending standards for different types of property. Hence, it is important to compare loan options before financing a second home.
Can You Avoid Higher Interest Rates On A Second Home Mortgage?
When applying for a mortgage loan, you will need to specify how you intend to use the property. And lenders take such statements seriously. Because they do not want to finance riskier investment properties with housing finance.
It may be tempting to declare your second home as your primary residence and benefit from lower interest rates or an easier qualification. But it is unwise to do so.
Lying a mortgage application can result in thousands of fines. In very serious cases, mortgage fraud can even result in jail sentences.
So always be honest with your lender. And ask lots of questions if you are unsure of the credit rules. For example:
Can overnight stays be booked? Are there restrictions on the number of nights you can rent? How much time do you need to spend there to qualify as a vacation rental instead of an investment? Can you have an additional unit?
Receive written responses to make sure you fully understand the requirements for your second mortgage.
And if you are struggling to qualify with one lender or find the loan program you need, try another lender. They all have different loan options and interest rates.
Do I need a second home or investment mortgage?
The real estate market is changing – and so are the mortgage rules. People are using their homes in new and different ways, which can affect the types of home loans needed.
If you want to rent all or part of your house or other building on your property, this can have an impact on financing. Check out some examples below.
And if you are unsure how your housing situation will affect your mortgage loan, contact a lender to learn more about what rules apply.
Apartments as hotels (Airbnb and VRBO)
The growth of Airbnb and similar services means that homes can be used in new ways to generate income. A guest room, a basement apartment or a converted garage can now function as a rental property. In major tourist destinations, prime residences are being converted into overnight rentals, increasing home prices.
In principle, you can rent part of your house and still finance it as your main residence. However, if you plan to use the house yourself for vacation and also rent it out, you will need a second home mortgage.
Additional residential units or tiny homes
The lack of affordable housing in many areas is causing entire states to change building code laws. Many homeowners can now build or buy smaller homes on the same lots as detached single-family homes.
For example, New Hampshire now allows Accessory Housing Units (ADUs) up to 750 square feet on single-family lots. Oregon has eliminated single-family home zones in many communities. California allows multiple units for land that was once restricted to single-family homes.
This could be a bypass for homeowners looking to purchase an investment property without a mortgage loan. You can buy a house with the ADU already connected and live in the main unit. Or, use a cash out refinance of your current home to build an ADU on your property – as long as you live in the original building.
Either way, you can rent out the secondary property for some extra cash even though it was technically bought with a main mortgage.
Second homes as first homes
Nowadays, some homebuyers even buy a vacation home as their first home. This can be a good workaround for young professionals who want to buy property but cannot afford it in their hometown.
But remember: even if you were to buy a vacation home with your first mortgage, it is still considered a second home mortgage in this situation. That's because you wouldn't be using the property as your primary residence.
Frequently asked questions about mortgage rates for second homes and investment properties
What is a second home?
Homeowners live in their second home for at least part of the calendar year. Although each mortgage lender has their own eligibility requirements, the IRS says a second home is a residence that you visit for at least 14 days each year, or 10% of the total days you rent it out.
What is an investment property?
An investment property is typically a rental property or house that is bought to renovate and convert for a profit. They differ from second homes in that the buyer usually does not live in an investment property. In addition, they can also be larger than one unit.
Are Second Home Mortgage Rates Always Higher?
While it's impossible to answer this question without knowing the interest rate on your existing mortgage loan, second home mortgages and investment properties usually have a higher interest rate. Of course, the price you qualify for will depend on your income, creditworthiness, location, and more.
What alternative ways to finance a second home are there?
If you do not pay cash to buy a second home, a second mortgage payment will be due. However, borrowers who have enough equity in their first home can use this value to finance a second home. Some home buyers use a cash out refinance to gain access to home equity by replacing their current mortgage loan with a larger loan and then using the lump sum of the leftover cash as a down payment on a second home mortgage. But for home buyers who have recently refinanced or just don't want to pay closing costs, a home equity loan or line of credit (HELOC) could give second home buyers access to up to 80% of the equity in their home.
What are the risks of a second home mortgage?
Not being able to pay the monthly installments on a second home mortgage or investment home loan is one of the greatest risks facing homebuyers. Because of this, it is important to buy your second mortgage to find lower interest rates and favorable loan terms in order to receive modest monthly payments. Also, watch out for higher mortgage rates – even small rate hikes can become a burden over the life of a loan.
Check out investment property and second home mortgage rates today
The mortgage interest rates for second homes and investment properties are higher than for first residences.
But interest rates are consistently low today – which means you're likely to pay less for a second home mortgage than you were a year or two ago.
Check your personalized prizes to see what you qualify for today.
The information contained on The Mortgage Reports website is for informational purposes only and is not intended to be an advertisement for the products offered by Full Beaker. The views and opinions expressed here are those of the author and do not reflect the policies or position of Full Beaker, its officers, parents or affiliates.