Second Home Guidelines And Requirements On Conventional Loans

This Article Is About Second Home Guidelines And Requirements On Conventional Loans

Second-home financing is different than investment properties. Homebuyers are eligible to finance second and investment homes with conventional loans. However, lenders consider investment homes higher risk than second home financing. Therefore, higher risk means higher rates and more down payment. This is why many second-home buyers want to make sure the second home they are buying is classified as a second home and not an investment property. There are strict second home lending guidelines for a property to be considered a second home and not an investment property.

What Classifies A Second Home

What Classifies A Second Home

There are various reasons why home buyers a second home. Per second home guidelines, a second home cannot be used for investment purposes. Fannie Mae and Freddie Mac have investment property loans. However, investment homes are considered riskier investments than primary and/or second home investments by lenders. Therefore, mortgage rates are much higher on investment home financing versus second home financing.

Per Second Home Guidelines, a second home needs to be at least 100 or more miles from the primary home. Or it can be less than 100 miles to the primary home if the proposed second home purchase is a waterfront property, golf course community, and/or in a high-profile entertainment center like Orlando’s Walt Disney World. In this blog, we will discuss Second Home Guidelines And Requirements On Conventional Loans.

Second Home Guidelines On What Classifies As Second Home

Government Loans (FHA, VA, USDA) are for owner-occupant properties only. Borrowers cannot qualify for second home financing with government loans. Second-home mortgages are conventional loans. Second home mortgage rates are similar to primary mortgage rates. Second-home rates are much lower than mortgage rates on investment homes. This is why many home buyers want second home financing versus investment homes. Down payment requirements on second homes is 10% versus 20% on investment homes. Owning second homes can benefit investors due to potential appreciation and writing off the second off from the income taxes.

Second homeowners can also rent out their second homes when they are not occupying them during and off-season.

 Second Home Guidelines And Eligibility Requirements

Here are some general guidelines on second home loans:

  • Borrowers need to meet Fannie Mae and/or Freddie Mac Guidelines
  • 620 minimum credit scores
  • Homeowners must occupy the second home as a vacation home and not an investment rental
  • One unit single-family homes, condominiums, townhouse, PUD
  • The home must be available for occupancy 12 months out of a year
  • The home cannot be an income-generating unit nor have any type of timeshare arrangements

The second home down payment requirement is 10% for a 1 unit – maximum loan-to-value is 90%. Private mortgage insurance is required on any conventional loans with higher than 80% loan-to-value.

Investment Versus Second Home Guidelines On Down Payment Requirements

Investment Homes require higher down payment than second homes. 

Investment properties are considered riskier investments. Therefore, mortgage rates are higher than second home mortgage rates. Investment Homes require higher down payment than second homes. 

Here are down payment requirements on investment properties:

  • The minimum down payment on one-unit investment properties is 15% or 85% LTV
  • Two to four-unit investment properties require a 25% down payment or 75% Loan-To-Value
  • For the best mortgage rates on investment property loans, borrowers should put a 25% to 30% down payment
  • Investment property owners can do a cash-out refinance of up to 75% loan-to-value on one to four-unit properties

Examples Of Second Versus Investment Homes

Mortgage Underwriters need to determine whether the potential purchase is a second home versus an investment home. For example, if a homeowner has a primary residence in Lombard, Illinois, and wants to purchase a Lake Michigan waterfront condo that is 30 miles away, it will be classified as a second home. However, if Lombard, Illinois has a 2,000 square foot home and wants to purchase a second 2,000 square foot home in Chicago, then it would be classified as an investment home and not a second home. If the same Lombard, Illinois homeowner wants to purchase a 2,000 square feet second home in Kentucky because they have kids and friends there, then the second home purchase would be classified as a second home.

Leave a comment