Pros and Cons of Owning Two Homes

Should I buy a second home, you may be asking yourself. Given the real estate market's growth and the fact that interest rates are changing, it's no wonder that many people are taking advantage while rates are lower and buying a second home, either for vacation or rental purposes.

But how can you be sure a second home is right for you? Take into consideration these points:

Second Home Mortgage Requirements

Requirements for a second home are more strict than those for primary homes. This is because you are now responsible for two homes—twice the expense and twice the upkeep. If you want a vacation property, you must also live in your second home at least part of the year (no renting it out!), otherwise it's considered an investment property and is subject to different requirements. In either case, below are a few general requirements you'll need to stick to in order to buy.

• You must have between two and six months of cash reserves, depending on your financial situation.
• Credit score requirements are higher than they are for primary residences. For many lenders, your credit score must be at least 640, but potentially higher depending on your lenders requirements or if you want to put less down or you have more debt.
• When it comes to income, this really depends on your debt-to-income ratio, credit score, and your down payment. That being said, you certainly don't have to be a millionaire to qualify to buy a second home. If you have rental income or a side job, you'll need proof (such as tax documents) you've had that income for at least two years for the lender to include it as part of your overall income.
• Your down payment should be at least 10% of the purchase price.

Reasons to Buy a Second Home

First, it can be a sound investment. The housing market will always fluctuate, but in the long run buying in the right area can be quite lucrative. Buying a second home can also be part of your retirement strategy if you keep the home in good condition, but before deciding this is right for you make sure to consult with a financial advisor and/or a tax advisor. You can also use it for passive income, but if you do plan to rent it out the home will be considered an investment property. Financial benefits aside, it can also be a special place to have quality time with your family, and is a guaranteed vacation spot to get away to. If you're thinking about moving forward with a second home, read our article How to Buy Your Second Home.

Disadvantages to Buying a Second Home

If your second home will be a vacation rental and you're going to be cleaning up after vacationers yourself, then be sure to factor in gas for the drive, cleaning supplies, and online listing costs in your return-on-investment scenario, not to mention the loss in productivity that comes with all the extra maintenance.

If you don't have the extra time to manage a second home, then you may want to consider hiring a cleaning, vacation rental, or property management service. Many online vacation management services, such as AirBnB or VRBO, charge a percentage of rental fees to property owners for each booking.

When it comes to financial planning for two homes, it can be tempting to just look at your potential monthly mortgage payment, but the costs don't end there. Factor in any taxes and the need for extra emergency cash if anything needs to be repaired.

Recommended Down Payment for a Second Home

At WaFd Bank, we recommend having 20% down, but you'll need at least 10% to qualify. This way, you'll save on your payments and will be more likely to have your offer accepted by the buyer. Because a second mortgage adds more financial pressure for you as a buyer, lenders also look for a higher credit score and more cash reserves.

WaFd Bank is Here to Help

We are primarily a portfolio lender; since we started serving communities in 1917 we prefer to keep loans on our books so we're always there. What does this mean for you? We're well versed with buyers who are looking to grow their portfolio with a second home. And since we keep the vast majority of our loans, we're not restricted by the requirements that other lenders are; we're able to make flexible, common sense underwriting decisions with your best interests in mind. Ready to see if buying a second home is the right move for you? Contact your friendly neighborhood loan officer or give us a call at 800-324-9375 to find out more.

All loans subject to credit approval.