Do You Have to Put 20% Down on a Second Home?

Purchasing a second home involves different financial considerations than buying a primary residence. Prospective buyers often inquire about down payment requirements, anticipating more upfront capital. Understanding how lenders distinguish property types and the factors influencing financing terms is important. This article explores what defines a second home, typical down payment expectations, factors affecting these requirements, and other financial implications.

What Qualifies as a Second Home

Lenders use specific criteria to categorize a property as a “second home” for financing purposes, distinguishing it from a primary residence and an investment property. A second home is a dwelling used for personal enjoyment, not as a primary residence. It serves as a recreational or vacation property, occupied for part of each year.

The primary difference from an investment property is intent; a second home is not primarily acquired to generate rental income, though occasional short-term rentals might be permitted. Lenders typically require the property to be suitable for year-round use and be a one-unit dwelling, such as a single-family house or condominium.

A common guideline is a certain distance from the primary residence (often around 50 miles), ensuring it’s not an extension of the main home. The owner must maintain exclusive control, meaning it cannot be subject to a long-term lease, timeshare agreement, or managed by a third party as a rental.

Common Down Payment Expectations

A 20% down payment for a second home is a common benchmark in real estate financing. While frequently cited, this figure is often a preferred amount rather than a strict minimum across all lenders. Conventional loans for second homes typically require a minimum down payment of at least 10%, though some lenders may ask for 15% to 30% or more, depending on various factors.

Lenders view second homes as higher risk than primary residences, leading to higher down payment requirements and potentially higher interest rates. Unlike primary residences, which may qualify for government-backed loans (FHA, VA, USDA) with lower or no down payment options, these programs are not available for second homes. Buyers of second homes typically rely on conventional financing, which necessitates a more significant upfront investment.

Key Factors Affecting Down Payment

Several factors influence the down payment required for a second home mortgage. A borrower’s credit score plays a significant role; higher scores (typically 680+) often lead to more favorable loan terms, including lower down payment requirements or better interest rates. A strong credit profile is beneficial as lenders scrutinize financial health closely for second home loans.

The debt-to-income (DTI) ratio, which compares monthly debt payments to gross monthly income, is another determinant. A lower DTI (ideally below 43% or even 36% for some lenders) indicates greater financial capacity and can help secure better loan terms, potentially affecting the required down payment. The loan-to-value (LTV) ratio, the loan amount divided by the property’s appraised value, directly relates to the down payment; a lower LTV (higher down payment) generally reduces lender risk.

Lender-specific requirements, known as “overlays,” also influence down payment amounts. Different financial institutions have varying internal policies stricter than baseline guidelines, leading to diverse offerings.

The type of property and its location can also impact requirements; certain property types, like condominiums, or properties in specific resort areas, may have unique down payment rules. The loan type, particularly the distinction between conventional and “jumbo” loans, affects down payment expectations. Jumbo loans, which exceed conforming loan limits, typically require higher down payments, often starting at 10% and potentially ranging from 15% to 40% or more for very large amounts.

Financial Implications Beyond Down Payment

Beyond the initial down payment, purchasing a second home involves several other financial considerations. If a down payment of less than 20% is made on a conventional loan, private mortgage insurance (PMI) will be required. PMI protects the lender in case of borrower default and adds an extra monthly cost to the mortgage payment until sufficient equity is built.

Closing costs represent another significant upfront expense, generally ranging from 2% to 5% of the home’s purchase price. These costs can include loan origination fees, appraisal fees, title insurance, and attorney fees. For second homes, these expenses can sometimes be higher due to perceived increased risk by lenders.

Ongoing expenses like property taxes and homeowners insurance also contribute to the total cost of ownership. Property tax rates vary by location and can be substantial, while insurance costs for a second home may be higher, especially in areas prone to natural disasters. Budgeting for maintenance and utilities is crucial. Even when unoccupied, a second home incurs costs for electricity, water, repairs, landscaping, and potential property management services, which can range from 1% of the purchase price annually for repairs alone.