More people than ever before are considering second home ownership in Texas and New Mexico. A second home can serve as a vacation home, future retirement destination, or wealth-building asset. However, it’s crucial to understand financial, logistical, and tax implications before you make a purchase. Here’s what to know if you’re wondering if you can buy a second home with a conventional mortgage in El Paso, TX, or New Mexico.
What Qualifies as a Second or Vacation Home vs Rental or Investment Property?
In order to secure a conventional mortgage, you must understand what qualifies as a second home vs investment property or vacation home:
- Second Home – This is a second home or vacation property located at least 50 miles from your primary residence or in a resort, beach, or mountain area that you occupy for part of the year and over which you retain exclusive control.
- Investment Property – This is an investment or rental property, the purpose of which is to generate monthly rental income. You do not need to live there, and it can be located anywhere.
Can You Use a Conventional Loan for a Second Home?
Yes, you can use a conventional loan to buy a second home. Most people turn to this type of financing for vacation homes or second homes because government-backed programs like VA loans and USDA home loans require that you live in the property full-time.
Requirements for a Second Home Mortgage
In order to qualify for a second home or vacation home mortgage, you must meet strict financial criteria. In fact, the requirements are typically more stringent than those of a primary residence:
- A credit score of at least 680
- A 10% minimum down payment
- A maximum 43% debt-to-income ratio
- At least two to six months of verifiable cash reserves
The property must also meet certain criteria:
- One-unit properties only, such as a single-family home, condo, or townhouse
- At least 50 miles or more away from your primary residence, or in a vacation or resort market
- Not tied to a timeshare, rental pool, or property management agreement
Benefits of Buying a Second Home With a Conventional Loan
You cannot use government-backed mortgages for a second home or one that you will not occupy full-time. This makes conventional financing the most traditional, flexible, and practical method. Other benefits include:
- More flexible rules regarding usage of the property
- Retain exclusive personal access of the home
- Generate short-term or limited rental income as long as you maintain year-round control
- Take advantage of tax-free income potential under the IRS 14-day rule
- Qualify for lower interest rates than what is offered through investment financing
- Enjoy reduced risk premiums and significant long-term savings due to lower interest rates
- Make a smaller down payment and preserve your liquidity
- Purchase cancellable mortgage insurance that drops off when your principal balance falls below 78% of the original home value
- Avoid hefty, non-refundable upfront fees associated with mortgage insurance premiums
Common Challenges Buyers Face With Second Home Loans
It’s important to be aware of the challenges you may face on the path to second homeownership so you can be proactive about avoiding them. Securing a conventional mortgage or jumbo mortgage loan for a second home can be more difficult and require a lengthier process than that of financing your primary residence. Some of the issues you may encounter are:
- Financial strain due to dual housing payments and mandatory hazard insurance and property management fees for rental or vacation properties
- Prohibition of using the property’s projected rental or Airbnb income to qualify for a loan
- Increase in your debt-to-income ratio
- High post-closing cash reserve mandates, such as two to six months of mortgage payments in a liquid asset account post-closing for both properties
- Higher base rates for loans
- Potential for increased closing costs
Tips for Securing Approval for Second Property Financing
You can lower your risk and make yourself more appealing to lenders by familiarizing yourself with approval requirements and potential shortcomings. You must present a low-risk financial profile and optimize your credit, assets, and debt structure. Here are some tips for improving your chances of securing second property financing:
- Try to pay off debt so that you can improve your credit score.
- Reduce revolving debt to lower your credit utilization and your debt-to-income ratio.
- Maintain a DTI ratio that is below 36%.
- Commit to a 20% down payment if possible.
- Build an asset reserve of at least six months of total mortgage payments for your primary and secondary residences in a verifiable account.
- Document your long-term liquidity, such as 401(k) or IRA account balances.
- Verify the 50-mile buffer and ensure the community or HOA rules do not mandate a rental pool or timeshare structure.
- Secure comprehensive insurance quotes prior to pre-approval.
Ready to Buy a Second Home? Call Today
Rocky Mountain Mortgage Co. has been helping homebuyers in Texas and New Mexico finance second homes since 1985. We take a highly personalized approach, providing each client with the information and resources they need to make an informed decision about their lending options. We ensure direct control over second-home underwriting, handling each part of the process in-house. We have extensive expertise in Southwest vacation property markets like Ruidoso, Cloudcroft, and Elephant Butte. We can quickly verify eligibility and prevent delays. We also offer specialized expertise in construction lending for custom second homes and can ease the transition from a construction loan to a permanent conventional mortgage. Call now or contact us online to get started in securing standard conventional financing or non-conforming jumbo loans for a second home or vacation property in El Paso, TX, or New Mexico.