Buying a second home may be an exciting notion for many, whether it is intended as a future retirement house, investment property, or holiday retreat. But for many would-be purchasers, the down payment often needed to acquire their ideal home might be a significant obstacle that keeps them from proceeding.
Buying a second home may be an exciting notion for many, whether it is intended as a future retirement house, investment property, or holiday retreat. But for many would-be purchasers, the down payment often needed to acquire their ideal home might be a significant obstacle that keeps them from proceeding. (Photo : by Tierra Mallorca / Unsplash)
After all, 20% of the buying price is usually the ideal down payment on a house. Private mortgage insurance (PMI) can be avoided by making a down payment of at least that amount on a house. Furthermore, a second property usually has stricter borrowing restrictions, so being able to afford a sizable down payment will help you be approved for a mortgage loan more easily.
However, it's not always necessary to have the down payment funds on hand in order to buy a second residence. There are innovative financing options that can enable you to put down no money to purchase a second residence. Below, we'll discuss what you need to know.
Use the Equity in Your House as Finance
Using the equity in your first housing, if you already own one, can be a smart method to finance a second property's down payment without spending cash for it. A home equity line of credit (HELOC) or a home equity loan are the two primary options for accomplishing this.
With a home equity loan, you can take out a lump-sum loan that you will pay back over a certain period of time, utilizing the equity you have accrued in your primary residence. With a home equity loan, the interest rate is often set, so your monthly payments are known ahead of time. Furthermore, a lot of lenders allow you to borrow up to 90% of the equity in your house, which you may use as a down payment on a second property.
In contrast, a home equity line of credit (HELOC) uses the equity in your house as collateral. It gives you access to a revolving line of credit that you may draw from as needed, making it operate more like a credit card. Because HELOCs usually have variable interest rates, when rates rise or fall over time, your monthly payments may also change. To be more flexible than a home equity loan, HELOCs let you borrow only the amount required for the down payment on a second property.
The primary advantage of utilizing home equity to purchase a second property is the absence of the need for a sizable down payment. You can use as much of your current home's equity as needed for the down payment, and the equity acts as collateral. If you choose this course of action, remember that your monthly housing expenses and total debt burden will increase.
Additionally, several specialty financing programs are available to assist in making it easier to purchase a second home, even with little to no down payment.
VA loans: You or your spouse can be qualified for a VA loan if you served in the US military at any point in the past or present. These loans don't require PMI and provide the possibility of a 0% down payment. Though you may use a VA loan to acquire a second home, there are restrictions on what you can use these loans for. You must meet certain conditions to utilize a VA loan for this purpose.
Loans for investor cash flow: Also referred to as rental property loans, these loans are intended for real estate investors. With as little as 15% down, you may buy an investment property from them, and you might even be able to utilize the property's anticipated rental revenue to meet your eligibility requirements.
Jumbo loan programs: With a down payment as little as 10%-15% of the purchase price, jumbo loans can offer a route to homeownership for expensive houses. These programs have a trade-off in that, in order to qualify, you usually need to have excellent credit, a low debt-to-income (DTI) ratio, and substantial financial resources. However, if you satisfy the requirements, they may be a terrific alternative.
Think About a Rent-to-Own Agreement
A rent-to-own or lease-to-own arrangement may allow some potential second-home purchasers to become homeowners with little to no down payment. Under these arrangements, you rent the property for a predetermined amount of time, with a percentage of the money going toward the final purchase price.
You can use the "rent credits" accrued as a down payment when you buy the house after the renting period. This enables you to enter the market without requiring a sizable down payment upfront. You should carefully consider the long-term expenses of signing into a rent-to-own agreement, though, as the total purchase price is often greater under this arrangement.
