How much do I need for a down payment on a second home?

Unless you’re sitting on a boodle of cash, buying a second home — whether for an investment property or a vacation home — will require you to make a down payment for a mortgage.

To qualify for a conventional loan on a second home, you’ll likely need to put down at least 10% — though some lenders require down payments of 20% to 25%. The down payment requirements will depend on factors like your loan type, credit score, and debt-to-income ratio.

But there are also ways you can purchase a second home without making a down payment. Here’s what to do.

Check your eligibility to buy a second home. Start here (Apr 25th, 2024)

The difference between a mortgage on a primary residence and a second home

Your primary residence is the place you call home for most of the year. For most conventional loan borrowers, qualifying for a mortgage on a primary residence requires a minimum down payment of 3% of the home’s sales price, a debt-to-income (DTI) ratio below 45%, and a credit score of 620 or higher.

Qualifying for a mortgage for a second home is a whole different story. Why? Because lenders are assuming more risk when they finance a second home mortgage. This makes sense since you’re adding another large, nonessential payment to your household’s expenses.

Typically, to qualify for a conventional mortgage on a second home you must have the following:

• Minimum down payment of 10%
• Credit score of at least 680 (although you might qualify with a 640 credit score if you make a down payment of 25% or more)
• Debt-to-income ratio of up to 43% (though some lenders may allow you to stretch up to 50%, depending on your credit score and the size of your down payment)
• At least two months of cash reserves

How to finance a second home

Generally speaking, there are two ways to finance the purchase of a second home: you can either get another mortgage or tap the existing home equity in your primary residence. You can access your equity with a cash-out refinance, a home equity loan, or a home equity line of credit (HELOC).

Cash-out refinance

A cash-out refinance entails refinancing the current mortgage on your primary home for more than what you currently owe and pocketing the difference in cash. In most cases, you can borrow up to 80% of your home’s value.

You’ll be getting a whole new mortgage, which means it will impact the mortgage interest rate you’re currently paying on your home, and you’ll be resetting the clock back to zero on the loan.

Home equity loan

A home equity loan is a second mortgage, borrowing against the equity you have in your home. You receive a lump sum of money upfront, which you begin paying interest on immediately.

Typically, you can borrow 80% of your home’s appraised value, minus what you already owe. If your house is currently worth $400,000, and you owe $200,000 on your mortgage, that gives you $200,000 in home equity, which means you could borrow up to $160,000 with a home equity loan.

Since a home equity loan is a second mortgage — meaning it’s in addition to the first mortgage you have on your current home — it won’t impact the terms or duration of your existing loan. You’ll make monthly payments on the home equity loan in addition to your existing monthly mortgage payment.

Home equity line of credit (HELOC)

A HELOC allows you to open a line of credit against your house, giving you access to up to 80% or 90% of the property’s appraised value in cash. It’s a rotating line of credit, which means you withdraw money as needed, up to the limit. After a certain period, you’ll begin repaying the loan in installments.

A HELOC offers more flexibility than a cash-out refinance or home equity loan since you can withdraw money whenever you need it, as opposed to taking one lump sum of cash.

One important factor to consider when choosing between a home equity loan or a HELOC is that a home equity loan has a fixed interest rate, whereas a HELOC has a variable interest rate. That means the interest rate you’re paying could vary over the life of the loan, depending on market conditions.

Check your eligibility to buy a second home. Start here (Apr 25th, 2024)

4 ways to fund a down payment on a second home

There are four ways that you can fund a down payment on a second home: savings, a cash-out refinance, a home equity loan, or a HELOC. Each funding option has pros and cons.

1. Savings

Using savings to fund a down payment is perhaps the simplest route to take. Plus, you don’t have to pay interest since you’re not borrowing money for a down payment from a bank.

But dipping into your savings also means that you’re reducing the amount of cash you have on hand to pay for things like emergency expenses and maintenance costs for your second home.

2. Cash-out refinance

A cash-out refinance gives you access to a large chunk of cash at a relatively low-interest rate, but your overall debt load will increase and you’ll be changing the terms of your existing mortgage.

Moreover, cash-out refinances typically have closing costs between 2% and 5% of your loan amount. These cover refinancing costs like lender fees, appraisal, and other expenses.

3. Home equity loan

A home equity loan provides predictable monthly payments since this type of loan comes with a fixed rate. However, closing costs typically run 2% to 5% of the loan amount, and home equity loans usually have higher interest rates than cash-out refinances or HELOCs.

4. HELOC

A HELOC requires you to pay interest only on the amount that you borrow or “draw” from the credit line, which can potentially save you a lot of money in interest. HELOCs also offer the option of interest-only payments.

But HELOC interest rates — while lower than home equity loan rates — are higher than cash-out refinance rates. Additionally, HELOC rates are variable, meaning you could face higher monthly payments in some months as the rate adjusts based on market conditions.

Can you buy a second home with no down payment?

It is technically possible to purchase a second home without putting any money down but the reality is that it’s complicated.

Government-backed zero-down loan programs are intended to help buyers purchase primary residences, which means they can’t be used to buy investment properties or vacation homes. That said, you already own a home and are looking to purchase a second home to move into as your new primary residence, you may be able to qualify for a zero down payment loan, such as a USDA loan (backed by the United States Department of Agriculture) loans or a VA loan (backed by the Department of Veterans Affairs). You’ll likely have to prove that you’re moving for a good reason, such as a job change or a military re-assignment.

Qualifying for a second home mortgage

If you intend to apply for a second home mortgage, you’ll need to meet certain eligibility requirements. These borrower requirements can vary depending on what type of loan you’re applying for. Typically, though, you’ll need at least 10% down and a FICO score of 680 or higher.

In addition, the property that you plan to purchase as a second home has to meet certain requirements. Typically, the new home must be at least 50 miles from your primary residence to be considered a second home. And, from a tax perspective, the IRS defines a second home as a property you live in for more than 14 days per year or 10% of the total days that the property is rented to others.

If you plan to rent out your new property full-time, it’s considered an “investment property” rather than a “second home.” Investment property loans are subject to higher interest rates and stricter requirements than second home loans (for example, you’ll likely need a bigger down payment — likely 20-25%).

Check your eligibility to buy a second home. Start here (Apr 25th, 2024)

Down payment for a second home FAQ

Do you need a down payment for a second home?

Typically yes. In almost all cases, to purchase a second home, you will need to make a down payment and it will be larger than the down payment needed to purchase a primary residence. Under rare circumstances, VA, USDA, and physician loans that don’t require a down payment can be used to purchase a second home. Assumable mortgages can also allow a borrower to purchase a home without a down payment.

How much down payment is needed for a second home?

Typically, you need to make at least a 10% down payment to qualify for a second home mortgage. However, there are certain types of second mortgage loans that allow for a lower down payment.

Can you put 5% down on a second home?

Yes, you can put as little as 5% down on a second home if you obtain a VA, USDA, FHA, or physician’s loan, though these loan programs are generally intended to help borrowers purchase a first home and can only be used for a second home under specific circumstances, such as a new job or military re-assignment.

Do I have to put down 20% on a second home?

No. Most lenders allow borrowers to put as little as 10% down on a second home with a conventional loan.

Can you use a HELOC for a down payment on a vacation home?

Yes, a HELOC is one of the most common ways that homeowners fund a down payment for a second home purchase. To use a HELOC for a second home down payment, you’ll need to have sufficient home equity in a property you already own.

How much equity should you have before buying a second home?

It depends on how you plan to finance your second home. Typically, you can borrow up to 80% of your home’s value with a cash-out refinance; 80% to 85% of your home’s appraised value, minus what you owe, with a home equity loan; or 80% to 90% of your primary residence’s appraised value with a HELOC.

Can I use my home equity to buy a second house?

Yes, tapping your home equity is a popular way to fund the purchase of a second home, but you must have a certain amount of equity to do so.

How can I use equity to buy a second home?

Using equity to purchase a second home allows you to pull out cash from your current home, either in the form of a cash-out refinance, a home equity loan, or a HELOC. Each option lets you borrow a certain amount of equity against your home.

Can I take out a HELOC on a second home?

It is possible to get a HELOC for the purchase of a second home, but, in most cases, you must have a debt-to-income ratio of 43% or below, a credit score of at least 700, and at least 20% equity in your primary home.

What are the risks of using a home equity loan to buy another house?

If you use a home equity loan to buy another house, you’ll be putting both your primary home and the second home at risk of foreclosure if you default on either loan, since you’re putting your primary home up as collateral. Also, because home values can rise and fall, you could become upside-down (or underwater) on your mortgage if your home’s value plummets and you owe more than what it’s worth.

The bottom line: Making a down payment on a second home

There are many financing options and down payment options for purchasing a second home. Whether you’re looking to purchase a rental property to generate rental income or seeking to buy a vacation home for your family, you can find the best loan option for you.

Check your eligibility to buy a second home. Start here (Apr 25th, 2024)