Second homes appeal to homeowners for many reasons. Some want to diversify their assets, others are looking to provide a place for adult children to stay, and some want be closer to their favorite vacation spot.
Before you purchase a second home, ask yourself why you want a second home. Do you want to prepare for retirement in a community you love? Do you want a place your family can stay in a beloved vacation spot? Do you want to generate extra income through renting? Will you be purchasing a single-family home or a condo?
Evaluating your needs and long-term goals will help you set realistic expectations and prepare you for the responsibility of owning a second home.
Second mortgages can be tougher to qualify for
Qualifying for a second mortgage can be more demanding. There are loans you can and cannot use for a second home. For example, a second home can’t qualify for government-backed mortgages, such as Federal Housing Administration (FHA) and Veterans Affairs (VA) loans. You will be able to take out what is known as a Jumbo loan to finance your purchase, and what you’ll need to qualify will depend on how you intend to use the property.
Know the ins & outs of occupancy rules
Before purchasing a second home, get to know occupancy rules. This will go a long way in helping you, and your lender determine the best mortgage for you.
To classify this property as a second home, remember that you will need to spend a certain amount of time there each year. Occupancy rules will differ depending on what type of mortgage you get. For example, Freddie Mac says, “The Borrower must keep the property available primarily (i.e., more than half of the calendar year) for the Borrower’s personal use and enjoyment.”
Will you be renting out the home?
When you are not living in the second home, will you be renting it out?
According to the IRS, a vacation home is either classified as a personal residence or a rental property. “If you use the dwelling unit for both rental and personal purposes, you generally must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose.”
Suppose you are taking out a Freddie Mac mortgage. In that case, you can rent the property on a short-term basis as long as the property does not require you to rent it out, like if you gave a management company control over the property’s occupancy.
Know if you can afford the responsibility.
The purchase of a second home is no light matter, with additional financial and security responsibilities like:
- Maintenance and repairs
- Security to keep the property safe when vacant
- Additional insurance
- Property taxes
Know your price range and carefully review your finances before committing to a second home. Maintain a safety net of at least six months of reserve finances in savings and consult with the professionals at SmartMortgage. We are ready to help guide you through the ins and outs of purchasing multiple properties.
The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.