If you’ve owned your primary residence for a while and have enough saved up in the bank, you may be thinking about buying a second property to live in a part of the year or to use as a vacation home. However, the buying process might be different the second time around, including mortgage rules.
During the mortgage application process, your lender will ask you how you intend to use the property to be purchased: as a primary residence, a second home, or as an investment property. Your answer will determine the type of loan you are eligible for and terms such as your interest rate, minimum credit score, the maximum loan to value, etc. Owning a second home can be an excellent investment in the long run. However, they present a higher risk for the lender since homeowners are more likely to default on a vacation home than the house they occupy daily. Therefore, the terms for mortgages used on secondary homes tend to be more stringent than those for primary residences.
This guide will help you understand the rules for primary vs. second home mortgage and the requirements you will need to meet to qualify for this purchase.
What is the difference between a primary residence and a second home?
The difference between your primary residence and a second home does not lay in the order in which you purchased the properties but in how you use them.
Your primary residence is the house you live in the majority of the year, and you use it as your mailing address. Underwriters will take into account the distance between your property and your employment location (if applicable) and if you intend to start living in the property within 60 days of closing.
A second home is a property that you occupy part of the year only, either seasonally or for shorter trips like weekends and vacations. To be considered a secondary residence, the house must be a one-unit dwelling located far away enough from your primary residence. The distance depends on the criteria defined by the underwriters, but most expect it to be at least 50 miles away. Exceptions may be made if the two properties are in areas with different points of interest (a house inland and a condo on the beach or in a skiing station, for example.) The borrowers must be the sole owners of the property, and it cannot be subject to agreements such as rental, timeshare, or property management agreements.
Can a second home be considered a primary residence?
Converting a second home into a primary residence is possible. There may come a time when your primary residence does not fit your needs anymore. For example, maybe you are ready for a lifestyle change after retirement. However, the process is more complicated than simply moving your belongings from your primary residence to your second home.
How to Turn Your Second Home into Your Primary Residence
To turn your second home into your primary residence, you must spend most of the year (at least 183 days per year) in the home. You will need to notify your employer, banks, insurance agents, etc., of the move and complete an address change form at the post office. For the second home to be considered your primary home, you will also need to support your claim by making the residence change official. You will need to register for a driving license in your new state, update your voter registration in your new municipality, and inform your accountant. In other words, your new address will be listed as your residence on both state and federal tax returns.
Since the mortgage terms for a primary residence are typically more advantageous than those for second homes, it may be tempting to lie on your mortgage application about how you intend to use the property. However, misrepresenting your intent on your loan application as to whether you will be using the home as a primary, secondary, or investment property is considered bank fraud. It could put you in hot water if your lender finds out.
Government-Backed Loan Requirements
Many loans with attractive terms (low interest rate, credit score requirements, down payment, etc.) – such as government-backed loans like FHA, USDA, or VA – require the homeowner to use the property as their primary residence for at least 12 months. The lender may check that the terms are observed using official data. If they encounter any discrepancies, they may demand that the borrower pay the loan balance in full immediately and start a foreclosure procedure if the homeowner cannot comply. There may be situations when moving before the end of the delay is unavoidable. For instance, perhaps you change jobs and have to move to a new location. In such cases, it is best to be upfront with your mortgage lender and provide the documentation you need to prove that you entered the mortgage agreement in good faith.
What are the differences between primary vs. secondary home mortgages?
It is often easier to obtain a mortgage for a primary residence than for a second home. If the borrower encounters some financial difficulties, they are more likely to do everything to salvage the place they call home rather than a property used primarily for leisure. Therefore, second home mortgages are perceived as riskier for lenders. Like for primary home mortgages, would-be buyers for second homes should shop around to see what different lenders may be willing to offer. However, here are some of the elements that you can expect.
Down Payment
You can purchase a primary residence with a mortgage allowing for a low down payment – under 5% of the purchase price, or even, in some cases, no down payment. Besides, many states and municipalities are financing programs such as down payment assistance to help individuals with lower income or buying a home for the first time to make homeownership more accessible.
However, borrowers can expect to pay a down payment equivalent to 20% of the purchase price for a second home mortgage and will not qualify for any assistance programs. On the positive side, those who already own property can take advantage of the equity they built in their primary residence and obtain a HELOC or home equity loan to finance part of their down payment on a second home.
Credit Score
Credit score requirements are typically higher for second homes than for primary residences. Since a second mortgage represents additional financial pressure, lending institutions may only consider would-be borrowers with very good or excellent credit scores (680 or higher.) Some may consider lowering their credit score requirements for vacation homes if they can offer a larger down payment (25% or more) to secure the property.
Interest Rates
If you are wondering, “are interest rates different for second homes?” the answer is yes. You can expect a difference of at least 0.125% to 0.25% higher than a comparable loan for a primary home. The higher interest rate is to alleviate the additional risk for the lender.
Cash Reserve Requirements
When obtaining a second home, buyers increase their financial burden, and mortgage lenders want to ensure that the would-be borrowers can cover expenses for both properties if anything happens. Most lenders will demand that applicants have at least two to six months (depending on their qualifications) of cash reserves sufficient to cover the monthly mortgage payment on both homes before approving the second loan.
Debt-to-Income Ratio
The debt-to-income (DTI) ratio represents the share of income you need to pay back your debt, including your mortgage. Taking out a loan to finance a second home increases your debt significantly. Therefore, lenders have higher requirements for second-home mortgages than for primary residences. Depending on the type of loan you are applying for, underwriters may include any other debt that you carry besides the mortgage (such as credit cards, student loans, personal loans, and car loans) to calculate your DTI. Most lenders will accept DTI up to 50% to approve a primary residence mortgage, but this number goes down to 45% or less for carrying two mortgages.
Type of Mortgage
You may not use government-backed loans (FHA, USDA, etc.) to buy a vacation home unless you treat the property as your primary residence for the first year following the purchase. Therefore, most second-home buyers use conventional mortgages. They can also use the equity they built in their primary residence to finance at least part of the purchase using a cash-out refinance, home equity loan, or home equity line of credit (HELOC).
Final Thoughts
Buying a second home could seem very tempting, especially for those who have owned their primary residence for a while and have accumulated enough equity over the years. If you are considering financing your purchase with a loan, be prepared to pay higher interest and comply with more stringent underwriting requirements. As a general rule, always shop around before committing to a lender to get the best rate and terms.
Alix Barnaud
After graduating with a Master’s degree in marketing from Sciences Po Paris and a career as a real estate appraiser, Alix Barnaud renewed her lifelong passion for writing. She is a content writer and copywriter specializing in real estate and finds endless fascination in the connection between real estate, economic trends, and social changes. In her free time, she enjoys hiking, yoga, and traveling.