How to Tackle the Second Home Buying Process Like a Pro

Scott Witherspoon, Chief Credit Officer, Affinity Federal Credit Union

If you’re in the market for a second home, you’re at least moderately familiar with the home buying process. However, there’s far more to consider when adding a property to your portfolio than its purchase price. Can you truly afford it? Before you answer “yes,” consider this: Every mortgage lender will look at a borrowers’ income, total debts or obligations, credit score and reserves; it all boils down to staying power.

Home Sweet Home sign

What is staying power?
When buying a second home, people often forget the purchase means double insurance, double property taxes and double the potential for home repairs or at least a requirement to build reserves for any necessary home repairs. Staying power is about more than whether you can pay the mortgage. It’s important to also show a lender that you have enough money set aside to support not only your second home and all that comes with it, but your primary residence as well and any other financial obligations.

But I’m planning for rental income. Does that matter?
The short answer is yes. However, in the event you don’t have renters year-round, you’ll need to ensure that you can front the full mortgage. Beyond that, you must account for maintenance of the grounds, repairs, and all of those surprise costs that come with being a home owner. And above all, you also need to consider the difference in tax treatment.

There’s a difference in taxes?
Different tax rules apply depending on whether you want to use the house for yourself, as a vacation home, as a rental property or a combination of these options. With any purchase – first home, second or third – we advise buyers to consult a tax professional. Having a tax professional as part of your personal finance team will help ensure you’re invested in what makes the most sense for your life at that moment and in the future. They’ll assist with understanding the possibilities for tax deductions and much more. Keep in mind, your interest rate will likely be higher with a mortgage loan on a second home.

If my interest rate is higher, does that affect my payment plan?
How much you pay back will be based on your interest rate, which is determined by the home appraised value, down payment and your credit score. Regardless, it’s important to sit down and consider your loan term, especially when deciding how much you want to put down on a home. Fun fact: Few consumers know they can tap into their 401k plan if their company allows that borrowing option. If you borrow against your 401k for a home, you’re generally allowed a 15-year loan term. Though many experts might discourage you from doing so, the reality is you’re essentially paying yourself back – instead of a bank. If the rate for your loan term through your 401k is lower by comparison, then it’s a viable option. Keep in mind, your 401k is intended to be one of the primary sources of your retirement nest egg.

How do I decide who to borrow from?
When searching for a mortgage lender, it’s best to begin with research. You can consult with one of Affinity’s Financial Advisors, ask family and friends for recommendations, and remember not to settle. In fact, if you get a mortgage loan estimate from another borrower, bring it into Affinity. We’ll review the estimate for free and see if we’re able to offer you something better. And in most cases, we can. Or, just come to us in the first place and let us take it from there.

The decision to purchase a home is huge. The decision to purchase a second home is even bigger. Don’t go into the process blindly. Ask all the right questions and set yourself up with a financial team that’s on your side. 

This information is for informational purposes only and is intended to provide general guidance and does not constitute legal, tax, or financial advice. Each person’s circumstances are different and may not apply to the specific information provided. You should seek the advice of a financial professional, tax consultant, and/or legal counsel to discuss your specific needs before making any financial or other commitments regarding the matters related to your condition are made.

Additional Resources:
How to Avoid Mortgage Application Nightmares

Do You Know How Much Cash You Need to Buy a Home?

7 Mistakes to Avoid Once You’ve Been Pre-Approved for a Mortgage

Thinking Of Buying a New Home? Start Here

How to Buy and Sell a Home Without Losing Your Sanity

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