You’ll know you’re ready to buy a second home when you have stable income, strong credit, at least 10% available for a down payment, and a clear plan for how you’ll use the house, either as a vacation or investment property. Having equity built up in your primary home can also give you more financing options and help you enter the market faster.
Buying a second home is an exciting milestone, whether you’re dreaming of a vacation retreat, planning for retirement, or building your investment portfolio. So, what does financial readiness actually look like in practice?
6 clear signs you’re prepared to own a second home
Here’s what to know before you purchase:
1. You have stable income and strong credit
A loan officer evaluates a second home purchase differently than a primary residence. You’ll need to demonstrate you can comfortably afford both mortgages; your credit score will impact your rate and terms. You can also subtract the interest you pay on your second home’s mortgage from your taxable income, just like your first home, as long as the combined debt for both houses is under $750,000.
For those who are self-employed, buying a second home is still possible. In this case, your loan officer will look at your “ability to repay” by evaluating your net income rather than just your gross revenue. If your tax-deductible expenses significantly reduce your taxable income, a loan officer can often use a bank statement loan program to qualify you based on your actual cash flow and deposits.
What to check: Do you have consistent income, minimal debt, and a credit score in good standing? Then you’re on the right track. Keep in mind that conventional loans for second homes typically require at least 10% down. The better your financial profile, the more competitive your rate may be.
2. You’ve built up equity in your primary home
Many homeowners leverage the equity in their current home to fund their second home purchase, often through a home equity line of credit (HELOC), home equity loan, or cash-out refinance.
What to check: If you’ve been paying down your mortgage and your home has appreciated in value, you may be sitting on a significant asset. The average homeowner today has nearly $300,000 in equity. Tapping into that equity could allow you to purchase sooner without needing to save for a down payment.
Hoping to buy a second home in the next few years? Look into putting down a smaller down payment on your primary residence. It may be cheaper to leave funds accessible than to pay to access them later through refinancing or a second lien. Your loan officer can help you weigh the pros and cons of this strategy.
Let’s make your second home happen.
3. You know how you want to use the property
How you plan to use a property determines how a loan is classified. This impacts your down payment, interest rate, and what you’re allowed to do with the home.
What to check:
- Vacation home/second home: You’ll occupy it personally for part of the year. You can do short-term rentals like Airbnb as long as you retain control over the property. However, you can’t rent to a long-term tenant or use management from a rental company for at least the first year.
- Investment property: You intend to rent it out long-term. This requires a larger down payment (typically 20–25%) and comes with a slightly higher interest rate, but it allows full rental flexibility.
Want to turn your current home into a rental? If you’re buying a second home and converting your current primary residence into a rental property, make sure you’ve lived in it for at least 12 months first. This was a requirement when you originally took out your mortgage; moving out too soon can create occupancy fraud issues. Your loan officer can help you navigate this transition.
4. You can afford the down payment
Conventional loans for second homes start at 10% down. Increasing your down payment amount, if you’re able, can improve your interest rate and terms.
What to check: Do you have liquid savings set aside, or are you planning to use equity from your current home? If you’re not quite there yet, start saving now. Even small, consistent contributions over the next few years can position you to buy when the timing is right.
Possible financing options to explore:
- Use a cash-out refinance on your primary home
- Apply for a home equity loan or line of credit (HELOC)
- Ask your loan officer about purchasing with a conventional, jumbo, or non-QM loan (including bank statement loans)
- If you’re buying a second home with a child heading to college, consider having them co-borrow so it qualifies as a primary residence with a lower down payment
5. Your debt is under control
Debt-to-income ratio (DTI) plays a major role in qualifying for a second mortgage. Your loan officer will calculate your ability to carry both home payments, plus any car loans, credit cards, or student loans.
What to check: Pay off credit cards monthly. Avoid taking on new car loans or large purchases in the years leading up to your second home purchase. When you have a lower DTI, it can be easier to qualify and with better terms.
6. You understand the big-picture expenses
A second home isn’t just about the purchase; it’s about the ongoing costs. Property taxes, insurance, maintenance, utilities, and HOA fees all add up. Fortunately, you can deduct property taxes on your second home too. Under recent laws (like the BBB), the limit for deducting state and local taxes (SALT) has increased to $40,000 for many homeowners, making it easier to write off these costs.
What to check: Have you run the numbers? If you’re planning to offset costs by renting, your loan officer can explain how they account for rental income. On conventional loans without prior rental history, only 75% of the rent counts toward qualifying income for your mortgage payment. However, DSCR (Debt Service Coverage Ratio) loans may qualify a borrower based on property cash flow instead of personal income.
Have questions about buying a second home?
We have answers. Reach out to a loan officer near you to find out if now is the right time to buy.
For educational purposes only. Sources deemed reliable but not guaranteed. Cornerstone Home Lending does not provide tax or legal advisory services. Please contact a qualified professional for specific guidance.