Buying a second home is the next step many people want to dive into after the success of the first one. The second may be appealing to people looking for a vacation home, a place for their children to live while attending school, or a way to diversify their assets. Is it possible to get many benefits the first time and want the same again the second time? Stay tuned and keep an eye on this article from HanFincal, where we will show you how to restart your journey smoothly.
1. Can you afford a second home?
1.1. Debt-to-income requirements
To qualify for a mortgage for a second home, you must meet debt-to-income (DTI) requirements. What do those requirements mean? This is explained by the amount of debt you have versus the amount of money you make is your DTI ratio. To calculate your DTI, add your monthly debt payments and divide them by your monthly pre-tax salary. Most lenders require a DTI of 43% or less to be approved for a second mortgage.
1.2. Monthly budgeting
You can be approved for a second mortgage on paper, but you should run the numbers to see if taking out another loan makes financial sense. To do this, add up all of your monthly payments and subtract the total from your monthly post-tax salary. The remaining funds will be used to make your second mortgage payment.
Choose the programs for purchasing a second home appropriate for your financial situation. A reasonable calculation and planning will assist you in escaping a tight financial situation or struggling with a financial crisis.
1.3. Rental maintenance
You should budget for the costs of maintaining a rental property. You will be responsible for all repairs and damages as both the owner and possibly the landlord. This could include hiring a repair person, purchasing paint, doorknobs, and other home improvement products, or hiring a lawn service to maintain the yard.
Set aside at least 10% of your yearly rent for upkeep and maintenance. If your property rents for $3,000 per month, the annual rent would be $36,000. As a result, you should set aside $3,600 for emergency repairs. Bear in mind that repairs could cost more or less than this estimate, so having more money saved is always a good idea.
1.4. Down payment and interest rates
Like buying your primary residence, buying a second home will necessitate a down payment and a mortgage (with interest). There are many ways to buy a second home with no money down, such as paying cash.
In fact, a larger down payment is frequently required for a second home. Why? This is because purchases of a second home are riskier due to the higher likelihood of default on this second one (versus a primary residence) in the event of financial hardship.
The same reasoning can be applied to interest rates. A mortgage for a second home almost always has a higher interest rate to hedge against potential losses in the case of a default.
2. Reasons to buy a second home
Purchasing a second home can be motivated by a variety of factors, including:
- Require a commuter home because you or your partner work too far away from your primary residence to make a daily drive or train trip feasible.
- Want a vacation home, either as a regular getaway or as a place to retire in the future.
- Want to make a real estate investment by purchasing a second home to rent out or flip.
- A home for your loved ones, perhaps to keep your parents close by or provide a campus-adjacent pad for your college student.
- Want to move up by buying a new house but keeping your current one as a rental.
It’s critical to be clear about your intentions because how you use your second home affects your financing options and ongoing costs, as well as the location and type of home.
3. How to buy a second home
3.1. Set a budget
If you have the proper budget, you will obtain everything. This is also important when purchasing a second home. So, before you begin, you must calculate and determine how much money you will need to save when purchasing it. The next thing is to plan a strategy for saving that amount.
First, decide on a timetable for saving. If you want to buy a second home when you retire and have 10 years to save, you should budget around $11,000 to $13,000 per year. When you break that down monthly, you’d need to save about $1,000 to reach your goal, which isn’t an impossible amount to save.
However, if you have 5 years until retirement, you’d have to double that amount.
Consider two factors: how much you spend each month and how much disposable income you currently have to commit to savings after your expenses are met.
Depending on your timeline for saving for a second home, you may already have enough cash flow in your budget to keep the required amount. If not, you’ll need to examine your spending to see if there’s anything you can cut or eliminate. If your monthly rent accounts for more than 50% of your income, take a chance to reduce it down to 30% with a Section 8 housing voucher.
If you cannot reduce your expenses any further, you can increase your income. This could be accomplished by working more hours, taking on a part-time job, a full-time job, or starting a side hustle to earn extra money.
3.2. Determine the location of your second home
When buying a second home, it is critical to consider the location. If you intend to use it as a vacation home, it should be far enough away from your primary residence to feel like you’re getting away from the bustle and hustle from the city, but not so far away that you rarely get to visit. If you intend to host family frequently, you may want to look for a property in a central location and within a few minutes of everyone.
Other location-related considerations for potential buyers include:
- The attractions in that area.
- The surrounding neighborhood – especially if you’re renting out the property to other tenants.
- What the weather/climate is like throughout the year.
3.3. Choose the right loan
Not all loans are available for the purchase of a second home. A jumbo loan, for example, is usually available, but an FHA or VA loan is not. Therefore, you should conduct extensive research into the loans you intend to use about their requirements and eligibility.
Furthermore, lenders consider various financial factors when evaluating someone for a loan on a second home. They are more stringent, for example, on a person’s debt-to-income ratio (DTI) and credit score.
3.3. Find a real estate agent
If you are not sure about gathering all of the information about the real estate you want to buy, or if you don’t have the time to do so, a reputable agent is the best option for you at this time. A reputable real estate agent in the market you’re interested in can assist you in making an informed purchase. Even if you can’t be there in person, they’ll be able to assist you in finding the right home.
Working with a local agent is a good idea, especially if you’re looking for a vacation property close to the local town, nearby beaches, or other attractions.
4. Factors to consider before buying a second home
4.1. Added responsibility
You’ll be exhausted if you try to do too much with two properties. It may be a good idea to delegate responsibility to trustworthy third parties. It’s time to start considering how you’ll maintain the property grounds while also managing the financial burden of extra caring for your properties.
4.2. Occupancy rules
If you use a jumbo loan or another type of non-conforming loan on your second home, you are only allowed to rent it out for 14 days to another tenant. However, if Fannie Mae or Freddie Mac backed your loan, you can rent out the property for up to 180 days, not being considered an investment property.
To keep your mortgage interest deduction eligibility, you must occupy the home for at least 14 days or 10% of the days it would otherwise be rented out, whichever is greater. Remember that if you rent out the property for 15 days or more, you must report the income to the IRS (Internal Revenue Service). However, you may also be able to deduct certain rental expenses.
If you do not follow the IRS’s minimum residency guidelines, lenders will most likely consider it an investment property.
Although you are not in your second home frequently, make sure that everything will be fine. Not living in a home for an extended time may risk protection and maintenance. Let’s begin by determining how utilities will be handled when you are absent in your second home.
You ought to decide whether you want to keep them all active and pay for them even when you’re not there, which utilities are potentially safe to turn off while you’re not using them, which utilities should be left on, and more. Because you can’t live in two places at once, you may want to think about the security of your unoccupied home.
When purchasing a second home, you should also consider seasonal home maintenance. When you aren’t there, you may need to do some work, such as winterizing a home or maintaining the lawn. Some items may be purely decorative, while others may aid in preventing damage to your home.
4.4. Additional expenses
Don’t forget about any additional expenses you may incur. In other words, there may be additional costs associated with moving from one property to another. For example, if you live in Penn State but plan to spend a few weeks a year at your second home in Arizona, you may incur parking fees, flight costs, and other expenses.
Buying a second home as a vacation destination is a personal decision that only you can make. If the benefits outweigh the drawbacks, contact someone you trust to assist you in finding your second home. Moreover, this plan can inspire you and keep your motivation always active to earn more money, and it can be an ideal part of your perfect retirement plan. Allow HanFincal to accompany you on this incredible journey.
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