Investing in additional real estate outside your primary home can be a smart way to put your money to work for you. However, it can be a bit daunting to come up with a hefty down payment for that second home mortgage. Thankfully, it is possible to buy a second home without having to come up with a down payment.
Purpose of a Down Payment
The obvious purpose of a down payment is to reduce the risk for the lender when it comes to issuing you a mortgage on a second home. What you plan on doing with your second home will greatly impact how much of a down payment you will be expected to make. For example, lenders will typically ask for between 15% and 25% down for property you plan to use as an investment if you want to rent it out. Standard mortgage loans often demand down payments of at least 20% to avoid having to pay private mortgage insurance.
Second Home Mortgage Requirement & Lender Risk
Buying a second home differs greatly from financing your first or primary home in terms of how mortgage companies consider the risk. For example, with first or primary homes, many credit lenders will allow you to borrow money even if you fall into a lower range of credit scores. Conversely, many lenders require a higher credit score and a more proven credit history overall to qualify for a second home mortgage. In fact, many will require a credit score of 725 or more.
Government Insured Loan
One way to forgo the requirement of a down payment for a second home or the subsequent requirement of private mortgage insurance is to finance using a government-insured loan. This type of loan, which includes loans like USDA or VA home loans allows you as a buyer to purchase a home without a down payment. There is one primary caveat to the process though. You must live in the home with the government loan as your primary residence. How many people get around this when buying a second home is to live in your second home, making it your primary residence and renting out your other home, making your first residence your investment property. It’s also important to consider the fact that not paying anything down will increase the amount you have to pay over the life of the mortgage.
Current Home Equity
You can also use any equity you have built up in your current home to use to purchase a second home. You can use a cash-out refinance option on your current mortgage, allowing you to take out money that you then turn around and invest in a new property.
Assumable Mortgages
Assumable mortgages allow you to assume a home seller’s FHA or VA mortgages under specific circumstances. This means you take over the seller’s mortgage, assuming the duration of the mortgage. You do not have to make a down payment at all with an assumable mortgage.
Reverse Mortgage
Finally, if you want to avoid having to pay a down payment on a second home, you can consider utilizing a reverse mortgage to pay for your second home’s purchase. You can only qualify for this type of mortgage if you are aged 62 or older, though. A reverse mortgage basically means you borrow money against the equity in your home.
You Can, But Should You?
As outlined above, it is possible to avoid having to make a down payment with the purchase of your second home. However, keep in mind that doing so will end up costing you more in the long run, so enter into it knowing all your options and their long-term repercussions.
