man holding a key to his second home

Should I Buy A Second Home? Everything You Need to Know Before You Shop

Buying a second home is a big decision, make sure you’re prepared with the best options.

Buying a Second Home

Do you dream of owning a spectacular vacation home? Have you considered purchasing an investment property as part of your financial strategy? Buying a second property allows you to diversify assets, build additional equity, and even supplement your income if you plan to rent the space. You may be pleasantly surprised to also find some nice tax breaks along the way.

Regardless of why you want to purchase a second home, it can be a worthwhile and profitable investment, although not without some risk. Before you begin the property search, you’ll want to take a close look at your finances. These, along with your budget, will be the best way to ascertain your readiness to invest in real estate and how much you can reasonably afford.

Can You Afford It?

Buying a second home is an exciting event! You’ll have the fun of shopping for a new home while bolstering your investments and laying the foundation for a more secure future. It’s important to balance that excitement with practicality. After all, two properties mean twice the responsibility.

Maintaining dual properties comes with a cost. As you plan a budget, there are several items you’ll need to account for:

  • Property taxes
  • Homeowner’s insurance
  • General maintenance
  • Repairs
  • Down payment and closing costs
  • Mortgage payments

Before you make an offer on a property, the first thing you’ll need to do is save up a healthy down payment. Down payment requirements will vary based on the loan options available to you, but buyers should be aware that typically less assistance is available for second homes than for first homes. (An On Q Financial Mortgage Consultant can help you review mortgage options for your vacation or investment property.)

If you have a solid savings account and enough free time available to manage two properties, you might be in the perfect position to invest. Knowing if you are ready to buy is just as important as knowing why you are buying.

Vacation or Investment Property

Buying a primary residence is quite different from buying a second home or investment property. At first glance, even the difference between purchasing a vacation home and an investment property is significant.

Vacation Home:

Obtaining a second home for vacation or occasional recreational use is considered a “leisure” purchase. The financial requirements to purchase one are similar to that of a primary property, but with fewer assistance programs available to homebuyers. A vacation home is a personal purchase and should be a place where you will enjoy spending time.

Investment Properties:

There are stricter requirements attached to the sale because they are purchased for the purpose of making a profit. An investment property may require a higher down payment and will likely incur additional taxes on any profits (known as a capital gains tax).

An investment property might include any of the following:

  • A home that is rented out year-round
  • A home that is rented out part of the year
  • A home that is purchased to be “flipped” or resold

Several factors will contribute to your vision of a second home. Consider the work involved to maintain it, how much you can afford to spend, how far you are willing to travel, and how you will ultimately use your new purchase. Once you’ve made those decisions, it might be time to get started. And the best way to get started is by speaking with a mortgage expert.

How Can A Mortgage Expert Help?

Everyone’s financial situation is unique. When you decide to purchase either a vacation home or an investment property, loan options will vary based on your eligibility requirements. These include your credit score, credit history, work history, current or previous mortgages, etc. Our expert On Q Mortgage Consultants have experience finding the perfect home loan fit from our wide range of products and are here to help.

Before you speak with a consultant, you’ll want to prepare a list of the questions you have. The more information you can provide regarding your goals, your current assets, and your target purchase amount, the easier it will be for a mortgage consultant to customize your options.

So what questions should you ask? Here are a few important ones that we suggest you put on your list:

  • Does your interest rate include points?
  • What options do you have for paying closing costs?
  • What is your availability?
  • What are your lock options?

What Will This Mean For My Taxes?

In addition to discussing financial options with an expert On Q Mortgage Consultant about your loan options, we also recommend you talk with a licensed tax specialist before committing to a second home. That vacation or investment property might come with specific implications that could either impact your ability to purchase or prove beneficial come tax season.

You’ll need to pay annual property taxes on any property you own, not just your primary residence. Know the property tax costs of any homes you look at purchasing and factor that into your budget before making a decision. If you rent the property out for longer than 14 days, the IRS requires you to report the income. In the plus column, many expenses you incur – like those same property taxes or maintenance costs for rental properties – may be tax-deductible.

Make sure you know every one of the financial implications of making this purchase. Having conversations with a tax specialist and an On Q Financial Mortgage Consultant will ensure you have all the information you need to move forward with confidence.

What Are My Mortgage Options?

There are several government-backed options for buying a first home, but these are less commonly available for secondary properties. A buyer may find assistance from conventional and broker products designed explicitly for second homes. Both Fannie Mae and Freddie Mac offer loan options for second-home buyers.

On Q Financial also offers non-qualified mortgage (Non-QM) loans with flexible qualifying standards through our broker partners. A large bank is unlikely to fund a non-conforming loan because they consider it too high of a risk. An independent broker, like On Q Financial, is often able to offer more flexible qualifying standards. For more information on non-conforming loans, speak with your On Q Financial Mortgage Consultant.

Occupancy Restrictions for a Second Home

Individual loan programs have restrictions on how many days you can rent out your home in a single year before it is considered an investment property. Requirements for loans on properties that are categorized as second homes will include:

  • Must be occupied by the borrower for some portion of the year
  • Is restricted to one-unit dwellings
  • Must be suitable for year-round occupancy
  • The borrower must have exclusive control over the property
  • Must not be a rental property or a timeshare arrangement
  • Cannot be subject to any agreements that give a management firm control over occupancy of the property

For clear guidance on the loan options available for your unique financial situation, it’s best to talk to your mortgage consultant. An On Q Financial Mortgage Consultant can also offer a faster and simpler pre-approval process based on your eligibility, so you’ll be ready to shop for your second home.

Ready to Start Shopping?

Now that you know what you can afford and how you can finance it, it’s time to start the fun part – house hunting! As always, your best bet is to consult an expert: in this case, a trusted real estate agent should be your first point of contact.

Realtors and real estate agents have only your best interest in mind when they help you find a home so take advantage of their expertise. Real estate agents have experience assisting prospective homebuyers find just the right property. They also have in-depth knowledge about the local housing market that will be invaluable to your search. Be sure to explain your goals and desired specifications for a second home. They will provide you with a market analysis that ensures you are getting the best data as you move forward to invest in a property.

We also recommend you do some market research on your own. While a real estate agent is your most valuable resource, it’s a good idea to look at homes online to see if someplace catches your eye. The perfect home might be different from what you think you want, and it might be a case of knowing it when you see it. And no one knows what will feel right better than you.

Start by researching nearby amenities, health care, and schools. If you are purchasing an investment property, consider what might attract a renter. Area Vibes is an excellent resource for determining “livability” and cost. Keep in mind the location, how much work the property will need, and where it lands on your budget. Most importantly, take your time and enjoy the ride; this is supposed to be the fun part, after all!

Take the Plunge

You’ve found your new dream home or investment property, and it’s time to make an offer! Having done it before as a first-time homebuyer should give you more confidence in the negotiation process this time around. As with your first home, next comes the waiting period, inspections, and lots of paperwork to sign.

While you’re scouting furniture and paint colors, On Q Financial will be busy working tirelessly behind the scenes. Our job is to ensure the process is as simple and easy for you as possible. It’s also wise to refrain from taking on a new credit line or making large purchases until you close, and be sure to pay all of your bills on time. Your application will be processed before you know it, and you will have officially closed on your second home!

Have we convinced you to start shopping for a vacation home or investment property? Contact one of our expert On Q Financial Mortgage Consultants to learn about your options and get pre-approved. Our mortgage consultants are here to help you find options tailored to your specific needs. The best part is our Mortgages Simplified™ journey means less stress and more ways to say yes!

Realtor Fees and Commissions Explained

Now that you’re comfortable and confident with the home buying process, you might be thinking about where you can trim some fees. Before looking to cut realtor fees, you may want to check out our Explanation of Realtor Fees & Commissions.

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