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Financing a Second Home or Investment Property
Buying a vacation home or a rental property is a different kind of purchase from buying the home you live in. Lenders treat it differently too. Here’s how second homes and investment properties are defined, what they typically require and which loans can finance them.
Second home or investment property?
How a lender classifies the property shapes your down payment, pricing and qualification.
| Second home | Investment property | |
|---|---|---|
| Purpose | You use it yourself for part of the year | You rent it out to earn income |
| Occupancy | You occupy it some of the time; it isn’t rented full-time | You don’t live in it |
| Rental income | Generally not used to qualify | Can be used to help you qualify |
| Down payment | Higher than for a primary home | Typically higher than for a second home |
| Pricing | Usually somewhat higher than a primary home | Usually higher than a second home |
A second home is typically a one-unit home that’s suitable for year-round use and that you control, not one run as a full-time rental or timeshare. There’s no single mileage rule in Fannie Mae’s guidelines; lenders look at whether the home reasonably serves as a part-time residence for you.
Be accurate about how you’ll use it. Classifying a rental as a second home to get better terms is mortgage fraud. If you plan to rent it out, tell your loan officer.
What lenders look for
- A larger down payment than for a home you live in
- Strong credit, since pricing often improves with higher scores
- Cash reserves, often several months of payments for each property you own
- Debt-to-income ratio that includes both your current home and the new one
Loan options
Conventional loans
Conventional loans can finance both second homes and investment properties, which FHA, VA and USDA loans generally can’t. Our conventional loan guide covers the basics.
DSCR loans
For investors, a DSCR loan qualifies you based on the property’s rental income rather than your personal income. It can help self-employed investors and those growing a portfolio. Our DSCR loan guide explains the pros and cons.
Two- to four-unit homes you live in
If you buy a duplex, triplex or fourplex and live in one unit, it can count as your primary residence. That can open the door to FHA or VA financing, and rent from the other units may help you qualify.
Using equity from your current home
Some buyers use a cash-out refinance or home equity loan on their current home for the down payment. That increases the debt on your primary home, so weigh it carefully.
Costs to plan for
- Property taxes and insurance, which may be higher for rentals or vacation areas
- HOA dues, common in resort communities
- Maintenance and management, especially if you’re far away
- Vacancy, for rentals that sit empty between tenants
- Short-term rental rules, which some cities and HOAs restrict
Start with your plan for the property. A loan officer can compare a conventional loan and a DSCR loan for the same purchase.
Talk to a Patriot loan officer
Every situation is different, and a short conversation is the quickest way to know what fits yours.
This article is general information, not an offer to lend or a commitment to lend. All loans are subject to credit approval, underwriting and property valuation. Belem Servicing LLC, NMLS ID #715386 (NMLS Consumer Access).
Sources
- Fannie Mae Selling Guide, B2-1.5-03: Second homes
- Consumer Financial Protection Bureau, What is a debt-to-income ratio?