Deciding between a vacation home or rental property
Before reaching out to your bank, lender, and insurance provider, you'll need to identify your intended purpose of buying a second house. Beginning the process without a clear understanding of your property goals could have a long-term impact on your taxes and finances, so it's important to decide what you'll use the property for.
For example, if your second property will be another home for you and your family, that means you anticipate occupying it regularly. Therefore, you could deduct property taxes from it. In contrast, if you're planning on using it as a rental or investment, you'll be generating income from it, and this scenario means very different implications for your taxes.
Financing a second home
After determining whether you'll be relaxing half of the year in warm weather in your new vacation home or maintaining a rental property, the next step is financing. You may be asking yourself, "can I buy a second home?" If so, be prepared to put down at least 10% as lenders typically view second properties as riskier investments. Here are some additional qualifications your lender may have:
If it's a vacation home or second residence, you may need to:
- Live in the house for some part of the year
- Confirm it belongs to you and isn't run by a management group or used as a rental
If it's an investment/rental property, you may need to:
- Show you have a credit score of 620 or higher
- Demonstrate a debt-to-income ratio of between 36% and 45%
Protecting your vacation home
Finally, know that most lenders require insurance for a second home — or any mortgaged home. When you purchase a homeowners insurance policy for your second home, review your homeowners insurance coverage carefully so if the worst happens, you know what to expect from your insurance provider.
For example, suppose you purchased a second home by the beach. In that case, it's important to know what damage your homeowners policy may cover in the event of a hurricane or flood, as it's possible you may need a separate flood insurance policy. Learn more about how home insurance may cover storm damage.
Protecting your rental property
If you're buying a second property you intend to use as a rental property, you'll need to get rental property insurance, also known as landlord insurance by some. Landlord insurance may provide coverage for damage caused by fire, lightning, wind, and other perils.
Landlord insurance may also provide personal liability coverage, which means you may be covered if you're responsible for a tenant's injuries or damaged property while they're living in your second home. For instance, if a tenant trips and falls due to a sidewalk crack, your insurance provider may cover their medical expenses.