What to Know When Buying a Second Home

By Gary D. Farro, Senior Managing Director, First Republic Bank
April 16, 2019

Looking to summer in the Hamptons or escape winter on the Florida coast? While buying a second home is an exciting financial and personal milestone, many purchasers start searching without understanding that financial requirements, as well as expenses, are often heightened the second time around.

Taking a few moments to familiarize yourself with the up-front and long-term costs associated with buying a second home can save you from complications during the purchasing process. Below are some of the important distinctions between buying a primary and second home that, when considered, can prepare you to make the strongest bid on your dream vacation home or high-potential seasonal investment property.

Higher down payment

It’s a common misconception that the standard 20 percent down payment made for a primary residence will also apply for the purchase of a second home. Unfortunately, potential buyers are sometimes disappointed to find that the home they fell in love with will need substantially more upfront capital to purchase.

Down payment requirements typically range from 25 to 35 percent but can sometimes be as high as 50 percent depending on property cost, applicant credit score, and other outstanding fixed debts.

A couple considering the purchase of a $2 million vacation home, for example, may feel let down when they realize the $400,000 they’ve stashed away isn’t enough to fund their down payment. An upfront conversation with a banker can help an individual or couple set expectations for what’s within range before setting out on the open house circuit.

More liquid capital needed in the bank

When purchasing a second home, many financial institutions require a borrower to have a certain multiple of their fixed monthly expenses available in liquid reserves. This includes automobile payments, mortgages, monthly condo or co-op fees, real estate taxes, and potential bills for any outstanding lines of credit – whether they’re currently fully utilized or not.

A cash reserve requirement could be as low as 12 months, but it could be as high as 36 months depending on the amount of the loan and current levels of other outstanding debt.

For some, higher interest costs

Investment property purchasers are likely to face mortgage rates that are about one half of a percent higher than those seen by primary and vacation home purchasers. There is also often a fee (or point) of between one half and a full percent of the loan value, assessed for investment properties at settlement.

Second home buyers also face more stringent credit score requirements than those experienced by primary home purchasers. Individuals with a top tier credit score will generally have access to the most attractive mortgage prices.

Unexpected settlement surprises

An unsuspecting buyer can run into a few snags when purchasing property in a new state. A buyer looking for a second home in New York may not know to prepare for mortgage or mansion tax, for example, or to build in time for an application review by a condominium or co-op board. For California real estate, a purchaser may not know to hire an escrow agent or secure wildfire insurance protection. Settlement costs and requirements also vary by state, sometimes dramatically.

For first-time second home buyers, these unfamiliar requirements can add additional out-of-pocket costs or needlessly delay a purchasing timeline. Working with a banker or financial planner early in the search for another property can help a family or individual plan a working budget and prepare for the additional costs and requirements associated with buying a second home.

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