Buying a second home can be rewarding – but with great reward comes significant upfront costs. Fortunately, you can cut those upfront costs with a home loan with little or no down payment. You may be able to purchase a second home with little to no money down if you use this strategy, though it can have drawbacks, such as having to move out of your primary home.

We explore alternative strategies for financing a second home and how to purchase one without a down payment.

Can you avoid a down payment when buying a second home?

When you apply for a mortgage, you must make a down payment. If this is your second home, the down payment is often higher. Conventional loans require a down payment of at least 10%.

With a government-backed mortgage, you can finance a second home without a down payment if you plan to make it your permanent residence. Within 60 days of purchase, you must turn the second home into your primary residence. Your current home can then become an investment or vacation home.

Assumable mortgages are another option to explore to avoid making a down payment on a second home.

 

How to finance a second home with no down payment

There is no need for financing or a down payment if you purchase all cash. Most people, however, need the financial means to buy a second home, and financing options for such a home are limited since government loans are only available for primary residences. To avoid a conventional second-home loan's 10 percent down payment, here are some ways to do it.

Government-backed loans

During the 60-day window, after you purchase that second home, you may be eligible for government loans, which offer low- or no-down-payment financing. If you plan to turn your second home into a primary residence soon, these government-backed loans are worth looking into.

If you meet the eligibility requirements, you can apply for an FHA loan backed by the Federal Housing Administration. There is also a USDA loan, which requires no down payment but must be located in a rural area approved by the USDA.

Veterans Affairs home loans may be available for active-duty service members, veterans, or surviving spouses. These loans require no down payment for those who qualify.

Assumable mortgages

In cases where you don't intend to sell your second home, an assumable mortgage might be an option for you. It means you "assume" the seller's existing mortgage, so you don't need to put money down. Unlike conventional loans, FHA, USDA, and VA loans are usually assumable.

Reverse mortgages

Taking out a reverse mortgage can help you pay for a second home if you're 62 or older and your primary house is paid off (or close to it). Getting scammed in this industry is also possible, so be extremely careful when exploring this option. Rates, fees, and closing costs can be high, and these fees, combined with the payment on your second home, can put you in a financial bind.

Purchasing from a family member who gifts you equity

A relative might be willing to sell you a home and give you the equity they have already built in the property if you want to buy a second home with no money down. If this option is available, family vacation homes can easily stay in the family for multiple generations.

Leasing with an option to buy

Purchasing a home is possible with a "rent to own" contract, similar to leasing a new car. You rent the house for a set period and then pay a portion of your payments toward a down payment later. The set-aside funds can be used to purchase the home after the lease ends.

Taking advantage of home equity or retirement savings

Either of these two options can cover the down payment on a second mortgage without draining your bank account. However, both options have risks and may only be suitable for some.

A home equity loan or home equity line of credit (HELOC) can leverage equity in a primary residence. In the case of a loan or HELOC, a lender will provide either a lump sum or a revolving line of credit to help you buy a second home.

This is a second mortgage, so using it for another home purchase will result in three mortgages for the price of two. Additionally, the loan is secured by your primary home, so you might lose it if you can't pay it back.

You can also withdraw funds from a 401(k), an IRA, or another retirement account to purchase a second home, but it is risky to do so. Although these accounts are technically available for withdrawal before retirement, you may often be subject to an early withdrawal penalty. Also, dipping into these savings early can make withdrawals more difficult.

 

Lender requirements for second home mortgages

Second-home mortgage lenders generally require stricter credit scores, debt-to-income ratios (DTIs), and cash reserves.

When taking out a second mortgage, experts recommend a debt-to-income ratio (DTI) of less than 43% if you plan to take out a second mortgage. The credit score requirements vary by lender. However, having a credit score of 700 or higher can help you qualify for a mortgage on a second home.

 

Advantages and disadvantages of buying a second home with no down payment

When you purchase a second home without putting down a deposit, you gain the following advantages:

• Investing in a new computer doesn't require draining your bank account.
• Your second home can be enjoyed immediately without waiting a long time to save up for a down payment.
• Buying vacation destinations can save you money on hotel costs and earn you rental income.

Conversely, the disadvantages might outweigh the advantages:

• Spending more on home purchases can potentially reduce your monthly mortgage payments. The more you pay upfront, the less you'll have to pay back over time - with interest. Consequently, if you do not put down a down payment, the loan will be more prominent, and your monthly payments will be higher.
• Lenders often charge higher interest rates when the down payment is small or nonexistent.
• Additionally, suppose you don't make a down payment or have less than 20% down. In that case, you'll likely have to pay private mortgage insurance, increasing your costs.

As a last point, many low- and no-down payment options come with serious risks, such as leveraging your retirement nest egg or using your primary residence as collateral.

 

Bottom Line

It's okay to have a down payment of at least 10 percent to own a second home. Some loans and methods allow you to make your dream a reality without a down payment. There are risks associated with some of these options, so be cautious before making a purchase. Understand what you are getting into before making the purchase.

Start your approval with Mortgage Dove today if you're ready to find a second home.