- Hire a Trusted Real Estate Agent
- Get Approved for Another Mortgage
- Plan for Dual Homeownership
- Additional Considerations
- Plan Your Purchase from Home Equity Loans to Closing Costs
How to Buy Another House While Owning a House
Buying another house when you already own a home is a common practice. Some people purchase investment properties to grow their wealth while others want vacation homes for weekend escapes.
Even if you only want to live in one house, you might decide to buy your next house before you sell your current one.
The process of buying a second home is a little more complicated than purchasing your first one. You need to develop a financing plan and prepare for dual ownership. Fortunately, with the right preparation, you can move through each step easily.
Use this guide to learn how to buy another house while owning a house you currently live in.
Hire a Trusted Real Estate Agent
The first step in any real estate transaction is to work with a Realtor you know and trust. Hiring an experienced real estate agent can help you smoothly navigate the home-buying process. Even if your agent doesn’t have an answer for everything, they can connect you with financing and legal professionals who do.
Some real estate agents specialize in working with buyers searching for second homes. They can help you scout investment properties or search for vacation homes that fall within your budget. By reviewing your goals with potential agents, you can evaluate how much experience they have with your type of properties and how knowledgeable they are about your ideal region. You can feel confident that your agent is a good fit for your needs.
To find a quality Realtor in your area, try out FastExpert. You can read real estate agent profiles and learn about the types of homes they help people buy. You can also reach out to agents with specific questions about investment properties or multi-home ownership. Once you have a trusted guide, you can move forward with the purchase process.
Get Approved for Another Mortgage
If you are unable to buy your second home in cash, you will need to work with mortgage lenders to get financing for the property. There are multiple requirements to get approved for a second home. Here are a few things your lenders will look for:
- You must live in the home for at least part of the year.
- The loan only covers a single-family dwelling.
- You are the only one who is allowed to own the property.
- The second home cannot be managed by a property management firm.
- The home needs to be a certain distance from your primary residence.
These restrictions are used for vacation homes or second homes. They are meant to differentiate between a homeowner who wants another property to live in part-time and an investor who wants to buy multiple houses and rent them out as income. If you are interested in an investment property, you will need to work with an investment lender.
Discuss any concerns you have with your lenders if you are worried you won’t meet all of these criteria. For example, a surgeon who is on-call might want to buy a condo next to the hospital so they can quickly respond to emergencies.
This could put them too close to their first home which was intentionally bought in a good school district for their kids. Some lenders might make exceptions on a case-by-case basis depending on the market.
Understanding Second-Home Financing
Lenders also have different expectations for financing second homes. These properties are considered riskier because they are one of the first places where you will miss payments if your finances change. It’s hard enough managing one mortgage or maintaining one home, let alone two.
The first thing to consider is your down payment. For a first home, some lenders allow down payments of 3.5% – especially for first-time homebuyers working with the Federal Housing Administration (FHA). However, you do not qualify for these loans if you want a second home. Lenders usually expect at least a 10% down payment for a second property and usually charge higher interest rates for the loan.
However, just like a first home, there are multiple ways to get favorable loan terms on your second property. A good credit score will lower your interest amount and you can reduce the perceived risk to lenders by making a higher down payment. You can even look into paying mortgage points to lower your interest rate.
Follow the same steps you did when you purchased your first house. Look at your finances to determine your ideal down payment, debt-to-income ratio, and maximum monthly payment. This will help you understand how much house you can afford and which interest rates would be acceptable.
Explore Your Financing Options
If you have a small down payment – or no down payment – you can still buy a second home. There are multiple ways to liquidate your equity or secure financing that allow you to own two homes comfortably.
One option is to get a home equity loan, which allows you to borrow up to 80% of the value of your current property. For example, if you own your house outright and it is worth $500,000 then you could get a home equity loan of $400,000. If your home is worth $500,000 but you have $200,000 remaining on your mortgage, you could only borrow 80% of $300,000, which is your equity. This is $240,000.
Similar to a home equity loan is a home equity line of credit (HELOC). You are given a lump-sum credit that is based on the value of your first house. This could give you a substantial down payment or allow you to buy your second home outright.
If you want to buy a second home before selling your first home – to make the moving process easier – look into a bridge loan. These are short-term loans that are granted because borrowers should receive the funds to pay them off quickly. You would get a bridge loan to buy a second house, move, and then sell the vacant first house. Once the home sale ends, you will pay off the bridge loan. These loan terms are usually for six to 12 months.
A final option is a cash-out refinance. In this case, you refinance your mortgage and receive money back from the bank. This will give you a larger down payment for your second home, but you will have to pay two mortgages at the same time.
Set Priorities for Paying Off Your Loans
Once you have multiple loan payments each month, you can decide how you want to prioritize paying them off. Some homeowners aggressively pay down the smaller mortgage so they can own at least one of their homes outright. You might be able to pay off your primary home in a few years so you can focus on your second home. Other homeowners pay their mortgages equally and pay them down at the same rate.
There’s nothing wrong with having a home mortgage – or two – but the sooner you pay them off, the more you can save on mortgage interest.
Plan for Dual Homeownership
Gathering a down payment and purchasing a home is only the first part of owning multiple properties. There are multiple things to plan for once you become a dual homeowner. Here are a few financial considerations and maintenance responsibilities to keep in mind as you map out your future investment and living situation.
Budget for Two Sets of Taxes, Insurance, and Utilities
The first thing to know about dual ownership is that you have two sets of monthly costs. Even if you own one or multiple homes outright, you will still be responsible for paying property taxes, home insurance, homeowner’s insurance costs, electricity, water, sewage, trash, and internet costs.
While these costs are likely to fluctuate – you likely won’t have high water usage when you aren’t staying in your vacation home – they need to be part of your financial plan.
This also impacts potential investors who intend to rent out their properties. They need to consider the taxes and insurance while estimating what tenants will pay in utility costs, even if the tenants pay the utility bills themselves.
Look into Vacation Property Maintenance
Buying a vacation property feels like a fun and relaxing way to escape day-to-day life. However, these houses require just as much maintenance as your primary residence – if not more.
Consider working with a maintenance professional or company that specializes in managing vacation homes when you are away from them. These experts will cover basic landscaping, seasonal preparations, and cleaning. This way, you won’t arrive at your lake house with a large tree branch to cut and dust covering every surface of the interior.
Budgeting for these maintenance professionals will allow you to enjoy your home so every visit isn’t spent fixing and cleaning it. They will also catch small problems, like leaks and termites, before they cause serious damage. Addressing minor issues before they become major ones can also help you save money.
Prepare for Investment Property Management
If you plan to use your second home as a rental property, make sure you have a clear financial picture of the costs versus income. Many people view rental income as free money, but your monthly payments from tenants will be used to cover all of your operating costs.
Investors use rent checks to cover their mortgage payments, property taxes, and home repairs – very few turn a profit until they have paid off the house. The rest of the investment payoff comes when the home is sold and the homeowner profits through appreciation.
As you map out your potential rental income profits, remember that there will also be occasional dark months – or months where there aren’t any tenants in the house. You are responsible for keeping up with your expenses when you don’t have any income on the property.
Maintain Your Emergency Fund
Experts recommend setting aside at least three to six months of your salary to cover emergencies, like accidents that cause you to miss work or unplanned medical bills. It can be tempting to use this money to increase your down payment or cover closing costs on your second home, but you need to keep it intact. You never know when something could happen where you need those funds.
It might be frustrating to take on a higher interest rate on your home loan so you can protect this money, but it is often the better option. Regrowing an emergency fund can take several years, so you don’t want to turn all of your cash into home equity.
Plan for Your Home Sale
Once you buy your second home, you can enjoy the property for decades. However, you still need a plan for selling the property when the time comes. If the second home is not a primary residence, you will need to pay capital gains tax on the sale of the property.
You might decide to live in your vacation home full-time, making it your primary home for two years, before you sell it in order to enjoy the tax exemptions. There are also other options, like a 1031 Exchange, if you trade one real estate investment for another.
Knowing your estimated tax bill on the home sale will help if it is part of your retirement account portfolio or allocated to specific beneficiaries. These calculations can give you a clear picture of what the property is worth once you cash it out.
Even if you have been through the process of buying a house, purchasing a second home is still time-consuming and requires a lot of thought. First, make sure you have paid your taxes before you start applying for mortgages. This will speed up the process and you won’t get a surprise bill that eats into your down payment.
Remember to avoid taking out major loans or lines of credit before starting the mortgage process so they don’t raise concerns with lenders. Internally, keep an eye on your debt-to-income ratio so you aren’t spending more than you can afford.
Here are a few other things to look into before you commit to two monthly mortgage payments on different properties.
Reverse Mortgage for Seniors
If you are 62 or older, there is another financing option to consider if you want to buy a second home. A reverse mortgage allows you to sell your home back to the bank. You will receive monthly payments for your house until you decide to sell it.
The Consumer Financial Protection Bureau (CFPB) emphasizes that a reverse mortgage is not free money. Seniors lose equity in their homes while growing their debt in the form of interest and fees. When you decide the sell your primary residence, you will have to pay the bank everything you owe to close the reverse mortgage.
However, there are some cases where a reverse mortgage can help you achieve your second-home goals. This could be a good way to downsize your home as you can use your monthly payments to cover your second home costs.
Talk to different lenders and your bank or credit union representatives to learn about this option and other financing choices available to you. Ask why this is a better option compared to a home equity loan and review the pros and cons of each.
Investigate Other Ownership Types
If you still can’t secure the down payment you need to buy a second home, explore other options. There are additional ways to buy into investment properties without having to become a home flipper or collect rental income. You can also look into a vacation rental property that you share with others. Here are a few options.
- Co-own with family and friends: instead of buying a house on your own, invest in a property with a few friends or family members. You can split the mortgage payments and trade when each person gets the vacation home or divide the profits on an investment property.
- Explore REIGs: a real estate investment group (REIG) buys properties through a group of investors. Entering a REIG is similar to getting a stock portfolio, except you own multiple commercial and multi-family homes instead of buying into companies. This could help you get into real estate investing without having to buy property.
- Join a luxury vacation club: join a club that gives you access to different properties around the world. You can return to the same place each time or travel to various destinations across the country.
- Reconsider your dream home: there might be more affordable options if you look in different states or regions. Instead of buying beachfront property, you can save money by moving a few miles inland or to a cheaper city.
You can also wait a few years to achieve your goal of owning a vacation home or second house. This will give you time to save a larger down payment and potentially buy when interest rates are lower. The housing market is always changing and you could be in a good position to buy in the near future.
Plan Your Purchase from Home Equity Loans to Closing Costs
As you work through how to buy another house while owning a house, make sure you have your finances in order. Work with a financial advisor to learn about your options and your purchasing power. Talk to a real estate agent to understand the total costs associated with buying a second property. This will empower you to make smart choices from the beginning to the end.
Whether you want to buy an investment property or a vacation bungalow, the team at FastExpert can help. Find a Realtor through FastExpert who can help you buy a second home that meets your lifestyle and financial needs.