Buying a second home is a major expense. You might have several reasons for wanting to buy a second house. Perhaps, you’re buying a second home for vacations or weekend getaways. Or, it might be that you want to use it as a rental property for rental income. However, there are things to consider before buying a second home.
The benefits of buying a second home
If you’re buying a second home for rental income, you’ll benefit from many perks, especially tax advantages.
For example, you will be able to deduct interest, property taxes, homeowners insurance and other expenses against the property’s income.
Even if the value of the property declines, you will still be able to deduct depreciation from your taxes.
While these benefits are great, the mortgage requirements for a second home are much stricter than for a mortgage on your primary residence. So, make sure you can afford it.
8 Things To Consider When Buying A Second Home
1. Financing options: When you bought your first home, you had available to you what’s called an FHA loan – a government loan program.
FHA loans are an appealing and favorite choice among first time home buyers due to their relatively low down payment requirement.
FHA loans require a 3.5% down payment and a relatively low credit score of 580. However, FHA loans are not available to second home buyers.
That is because FHA requires the home to be the borrower’s primary residence. So, if you’re thinking of buying a second home, you will need to either use a conventional loan or financing it with your own cash.
2. A larger down payment: If you’re using a conventional loan for your second home, you will need to come up with a larger down payment.
Lenders for a conventional loan usually requires a 20% down payment of the home purchase price.
But for a second home which will be used as a rental property or vacation home, expect lenders to ask for 30% or even 35%.
3. A higher credit score. For an FHA loan, you only need a credit score of 580 to qualify. But for a conventional loan on a second home, you will need much higher credit score — usually 750 or higher.
4. Expect a Higher Interest Rate: Lenders will likely charge you a higher interest rate on your second home than your primary residence.
The reason is because they see a second home — be it a vacation home or a rental property — as riskier. They feel that you are more likely to default on a mortgage on your second home than on your primary residence.
5. Do your research: Just as you did your homework when you bought your place to live in, buying a second home is no different.
In fact, you’ll need to spend more time researching rental property. That means researching the neighborhood you will want to invest in, knowing the zoning laws for a particular area, the sales price for the homes in the area.
You will need to know if the area has adequate public transportation, schools, grocery shopping, etc,– things that potential tenants will need.
6. Be prepared to be a landlord: if you’re buying a second home to rent, be prepared to be a landlord.
And be prepared to deal with all of the headaches that come with being a landlord. Do you have sufficient time? Can you deal with problems?
Owning a rental property and being a landlord is time consuming. It is also hard hard work and you have to do your due diligence.
You can hire a property manager to run the property for you. But if that is not feasible, you’ll have to do it yourself.
That means, screening new tenants, collecting rent, dealing with delinquent tenants, fixing problems in the property, such as a broken pipe.
So before buying a second home, make sure you have sufficient time and make sure you can deal with the day-to-day headaches that come with being a landlord.
7. Do you have a stable income? Dealing with a second mortgage on your second home is doable.
While you may be able to afford upfront costs, if you don’t have a stable income, you may have to think twice about whether it is a good idea.
Plus, you still have to consider the additional expenses of owning a second home such as insurance, property taxes, maintenance, repairs, property management fees, etc.
8. Are you out of credit card debt? If you have paid off outstanding and high interest credit card debts, then purchasing a second home may make sense.
But if you’re still struggling to pay your debt, you may need to put buying a second home on hold.Â
The bottom line
If you’re thinking about buying a second home, whether it is for investment or vacation, be prepared to save some money, budget for expenses, and come up with a bigger down payment.
More importantly, spend as much time, if not more, researching for the home just as you did when your purchased your primary home.
Speak with the Right Financial Advisor
- If you have questions about your finances, you can talk to aÂ financial advisorÂ who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc).
- Find one who meets your needs withÂ SmartAssetâs free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals,Â get started now.
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