What to Consider When Buying a Second Home

Although similar to a primary residence, a second home differs in multiple regards. One, it’s often purchased for vacationing, as a place to retire, or as an investment. Two, most sold are in the South and West at an average price of $211,000 to a 46-year-old buyer with an income of $99,100 per year. Three, out of all possible types, the property tends to be single and detached.

If you’ve gotten to the age or life stage in which buying a second home seems like a possibility, what should you consider?

Before Buying

First, before you make a significant move, determine your goals, analyze the market and regional conditions, get your personal finances in order, and try to rent first to get a feel for the area. In most cases, second homebuyers need to have a higher credit score, better debt-to-income ratio, and a higher down payment. For an investment property the borrower plans to rent out, a 25-percent down payment may be required.

Region and purpose are particularly important. A safer area with better appreciation rates more often translates to a higher resale value years down the line. On the other hand, because of market conditions, flipping a second property is no longer recommended.

Lending

Although lenders seek out first-time and second-time homebuyers, borrowers wanting to purchase a second home may find fewer options out there. While standards remain the same and reflect similar qualifications as conventional mortgages, a lender may only approve a second mortgage for certain areas.

For the borrower, getting finances in order is extremely important. It’s advised to ensure your credit ranges from 725 to 750, if not higher, and to have a lower debt-to-income ratio, which may involve paying down a credit card, education loan, or primary mortgage.

As far as financing is concerned, borrowers may tap into their primary home’s equity or borrow against a life insurance policy.

Management

After you’re approved, the process of buying a second home doesn’t end. Borrowers must consider property taxes, utilities, homeowners association fees, tax-deductible interest, hazard insurance, and upkeep. For rental properties, a borrower is further advised to consider the tenants, monthly income from rental payments, how often he or she will live in the property, maintenance issue, and tax breaks.