How to Get a Mortgage For a Second Home or Investment Property

Are you thinking about investing in a rental property? You're likely wondering if getting a loan for an investment property differs from your usual home loan experience - the short answer: kind of. For starters, loans for investment or second homes usually have slightly higher interest rates. Also, you'll probably need to produce a larger down payment since lenders consider these loans a bit riskier. We’ll break down the specifics for you below.

The Difference Between Investment Properties and a Second Home

The primary difference between investment and second home properties is how you use them.

Investment properties are typically strictly purchased for income production, while second homes are purchased for personal use, while still having the ability for income production when not being used for personal enjoyment.

You might think you cannot qualify for a second home because you own two or more homes.

It's important to note, though, that a second home means it is "secondary." So, let's say you own five other properties. Suppose an additional one you plan to purchase will be a vacation home or a property you use when you are away from your primary residence, even for work. In that case, it may still qualify as a second (secondary) home.

You might think you cannot qualify if you're a renter because you don't own your primary home.

Where you live qualifies as your primary residence (even if you're renting), and as long as you meet the loan requirements, you can still purchase a second home.

Down Payments 

The down payment requirements for second homes and investment properties can vary depending on the loan program and purchase price. Part of the attractiveness of purchasing a second home is that lending products often offer lower down payment options for second home purchases.

• 10% is the standard for conforming/conventional second home loans. Jumbo second home loans often require 15% - 20% down, but there are still some 10% jumbo second home loan options out there.
• 15% down is the standard for single family conforming/conventional investment occupancy loans. 2-4 unit properties will almost always require a min of 20% - 25% down payment. Jumbo investment occupancy or specialty loans like DSCR will traditionally range from 20% - 30% down payment depending on the loan program.

Interest Rates

Interest rates fluctuate, but one constant is that rates for second homes and investment properties tend to be higher than those for a single-family primary home. Depending on the property type and loan amount, count on these rates being 1% - 3% higher on average than primary homes.

Financing Second Homes & Investment Properties

When it comes to financing your second home or investment property, you have several loan options to choose from.

Conforming Loans: These loans are a standard option that follow the guidelines Fannie Mae and Freddie Mac set. The loans have a maximum borrowing limit that vary with location. While about 97% of the country maxes out at a $766,550 loan amount (not purchase price) for a single-family home purchase, there are some high-limit areas.

Jumbo Loans: Mortgages that exceed Federal Housing Finance Agency limits (see above) are called Jumbo loans. These loans are typically used to finance luxury homes in markets where housing prices exceed standard loan limits.

Non-QM Loans: The most popular types of loans under this category would include Debt Service Coverage Ratio loans (DSCR), Bank Statement Loans, and Asset based loans. These types of loans benefit borrowers who may not fit under conventional financing. Keep an eye out for our next blog which will go into more detail on this topic!

Government-Backed Loans: FHA, VA, and USDA loans typically require borrowers to live in their financed properties. But there’s a loophole: If you buy a multi-unit property (duplex, triplex, etc.), you can use an FHA or VA loan if you occupy one of the units and rent out the others.

Unlock Your Investment Potential with Wealth Builders Mortgage

Are you looking to finance your next property investment? Wealth Builders Mortgage is your go-to expert. We specialize in helping clients secure mortgages for investment properties and second homes. Whether it's a second home or a rental property, we're here to find the right mortgage solution for you. Contact us today!