Second home mortgage: How it differs from an FHA loan

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Kasey Tross

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You may have purchased your first home using an FHA loan, and now you’re looking into financing a second home. But because FHA loans are designed for first-time homebuyers, this time around you’ll be looking at a second home mortgage rather than an FHA loan. It’s important to understand the differences between the two products so you’ll know what to expect from the process. 

What is an FHA loan?

If it’s been awhile since you applied for your FHA loan, here’s a refresher on some of the distinguishing characteristics between an FHA loan for a primary home and a conventional loan for a primary home. An FHA loan:
  • Is backed by the Federal Housing Administration (FHA) which will pay your lender if you default on your loan
  • Allows for a lower credit score than a conventional loan because of the added protection to lenders
  • Has a lower loan amount limit compared to other conventional loans offered in the same geographical area
  • Requires you to pay a mortgage insurance fee of 1.75% of the home’s value if your down payment is less than 20% of the loan value 

Second home mortgages vs. FHA loans

The biggest difference between FHA loans and second home mortgages is that lenders consider second home mortgages to be higher risk. They know that in a financial crisis you’re more likely to make mortgage payments  on the loan for your primary residence than you are on a vacation home. For that reason, the qualifications for a second home mortgage are stricter than those for an FHA loan. Here are the similarities and differences between a FHA loan and a second home mortgage. 

Credit score 

Because an FHA loan is designed to help first-time buyers achieve home ownership, the credit score requirements for an FHA-backed loan are lower than they are for a second home mortgage. FHA loans typically require a minimum credit score of 620, while a second home mortgage is usually 680 or higher.

Debt-to-income ratio 

Your debt-to-income ratio (DTI) is calculated by comparing the amount of debt you’re carrying to your income. With an FHA loan, your DTI maximum is 57%. But your DTI cannot exceed 45% for a second home mortgage. 

Down payment

A second home mortgage will have a higher down payment than your FHA loan, usually a 10% minimum compared to 3% with the FHA. However, one benefit of your second home loan is that you can take advantage of your first home’s equity and use a home equity line of credit (HELOC) or cash-out refinance to pay for all or part of the down payment for your second home. 

Interest rates

As you may have guessed, a second home mortgage will have a higher interest rate than an FHA loan. It will also be higher if your second home is classified as an investment property rather than a vacation home (see “Investment properties vs. vacation homes” below). Keep in mind that interest rates vary by lender, so it’s a good idea to shop around.

Type of home

FHA loans allow for duplexes and other multi-family dwellings, but second home mortgages are for single-unit homes only, unless it’s classified as an investment property.

Closing costs 

Both FHA loans and second home mortgages require closing costs, but these can vary from lender to lender. 

Property taxes

Many second home mortgages will roll property taxes into your monthly payment, similar to an FHA loan. 

Lenders

Most lenders that offer FHA loans and conventional mortgages for primary residences also have second home mortgages. 

Investment properties vs. vacation homes

Loan requirements will vary depending on how your second home is classified, with a vacation home having more lenient terms than an investment property. But how does a lender differentiate between an investment property and a vacation home? A vacation home:
  • Cannot be rented out more than 180 days out of the year
  • Must be occupied by you (the owner) more than 14 days out of the year
  • Must be 50 miles or more from your primary home
If you fail to meet any of these criteria, your second home will be considered an investment property and you could be subject to income taxes and higher interest rates on your second home mortgage. But having your second home classified as an investment property isn’t all bad news– lenders may also take into account potential rental income when calculating your DTI for an investment property, so in some cases, classifying your second home as an income property could be to your advantage. While it’s true that second home mortgages have tougher restrictions than FHA loans, many mortgage lenders will be flexible if you have financial strengths that compensate for your weaknesses. For example, if your credit score is a bit on the low side, but you can provide a higher down payment, a lender will be more likely to work with you. 

Financing your Pacaso

Pacaso’s LLC co-ownership model includes flexible financing options that can be used alone or combined with other financing. With our banking partners, we offer buyers access to a competitive-rate mortgage for up to 50% of the Pacaso’s purchase price.

FAQs

How do mortgage lenders and the IRS define a primary residence?Your primary home or primary residence is the property where you live for the majority of the year. Mortgage lenders and the IRS expect this home to be within reasonable driving distance to your place of employment, and they may require you to show proof of residency with the address listed on your driver’s license or voter registration card.How might buying a second home as a rental property affect my mortgage application?Unlike when you’re buying a vacation home, when purchasing a second home to use as a rental property, mortgage lenders may take into account potential rental income from your rental property and use it to adjust your debt to income ratio. This could mean a better interest rate and a lower monthly payment. What are some other options for financing a vacation home without a mortgage?Your three best options for buying a second home without a mortgage are to utilize your savings, sell assets and pay with cash, or tap into your primary home’s equity. Remember, even if you can’t pay for the second home in full using these methods, any of these options gives you a hefty down payment and reduces the mortgage amount of your vacation home. 

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