There are plenty of reasons to love living in the Carolinas—and vacationing here, too! Whether you live here year-round or are interested in finding your part-time home, there’s a mortgage out there that can make your dream a reality.
When you’re buying a home you don’t intend to live in full-time, though, such as a vacation home, a second home, or an investment property, the mortgage rules are a little different. You can expect higher interest rates, a bigger down payment, and stricter requirements than when you buy your primary residence.
Here we’ll give you some more details about getting a mortgage for an additional property and what you need to know.
Primary home mortgage vs secondary home mortgage
Your primary home is the place you live in from day-to-day. This classification is important for two reasons: getting a home loan and paying your taxes.
To lenders, a second home is one you live in for a portion of the year. It must be a one-unit home, and it can’t be a timeshare. The IRS says a second home is one you live in at least two weeks out of the year, or 10% of the time you rent it out to others.
For your primary home mortgage, you can use loan programs such as FHA or VA loans. These programs help you secure good interest rates and a low down payment. When you buy a second home, though, you generally can’t use an FHA or VA loan to finance it.
Mortgage rules for second homes vs primary homes
Each lender has its own requirements for getting a home mortgage, but there are some things you can expect.
Debt-to-income ratio: To buy your primary home, lenders may accept a relatively high debt-to-income ratio (DTI), which is the proportion of debt you have compared to your income. A DTI of 50% is the max the FHA will allow.
For a second home mortgage, you can expect lenders to prefer a lower DTI, like 45% or less.
Down payment: Depending on the loan program you choose, you might be able to buy your main residence with little money down, such as with FHA or VA loans. Those programs offer mortgages with down payments as low as 3.5% (FHA) or even zero (VA).
But for your second home, you’ll need between 10% and 25% of the purchase price for a down payment.
Credit score: You can get a mortgage for your primary residence with a lower credit score. FHA loans may accept borrowers with scores of 500, but you’ll have to put more money down; typically 10%. You’ll be more likely to qualify for a smaller down payment on your FHA loan (such as 3.5%) if your credit score is 580 or higher.
For a second home, you’ll need a credit score of at least 640 for a chance to be approved, and you’ll likely need a score of 680 or higher if you want to put down less than 25%.
Cash reserves: You generally don’t need to worry about keeping a reserve of cash to qualify for a primary home loan unless your credit score is low.
For a second home, a lender will likely require you to have between two and six months worth of payments in reserve. That ensures you’ll have enough cash to pay your mortgage payments for a while even if you experience an emergency, such as losing your job.
Mortgage rates: Mortgage rates for a primary home are generally lower than they are for buying a second home.
For example, if a primary mortgage has an interest rate of 7%, you might expect a second home mortgage to carry a rate of 8%.
You can use our residential Mortgage Calculator to compare rates, down payments, and other details between a primary mortgage and a secondary one.
Insurance: You should expect your lender to require you to insure the home, whether it is a primary home or a second home.
Taxes: You can deduct your mortgage interest on your income taxes for both your primary home and your second home.
Mortgage rules for second homes vs investment properties
There is a difference between second homes that you use part of the year, like vacation homes, and homes you buy as an investment. Investment properties are purchased with the intention of profiting, first and foremost.
Occupancy: Investment homes can be multi-family units, and there is no requirement that you live there at all, unlike with second homes and vacation homes. If you plan to live in one of the units, you may be able to get an FHA loan for a two-, three-, or four-unit building and rent out the other units to earn income. It can still be considered your primary residence.
Down payment: On the other hand, lenders know that if you get into financial trouble, you can walk away from an investment property and still have a place to live (your primary home). That’s why down payment requirements are higher on investment properties than on primary or secondary homes.
Interest rates: Lenders will typically charge higher interest rates on investment properties as well, for the same reason.
Credit scores: You might need a credit score in the 700s to qualify for a mortgage for an investment property.
Reserves: Lenders will also want to know if you have six or 12 months of mortgage payments in reserve to cover the investment property if something happens.
Finding a mortgage for a second home
If you’re ready to level up and enjoy the benefits of a second property, whether for fun or profit (or both!), look for a Charlotte mortgage broker who can answer your questions and guide the way.
Fairway of the Carolinas offers personalized attention along with mortgage expertise. Our mortgage planners know the local markets and have the experience necessary to fine tune the mortgage process to your unique needs.
Whether you want a beachfront vacation home, a little extra income, or just a place to get away, find a home loan for your next property with Fairway.
