How to Buy a Second Home With No Down Payment
Looking to purchase a second home but wondering how you can do so without the funds for a down payment? Learn your options in this guide.
Buying your first home is one of life’s biggest milestones, and a lot goes into achieving it. But after you’ve made a hefty down payment, begun making your home loan payments, and poured extra money into upgrades and repairs, you might start to wonder if there’s a way to relive the magic with a second house.
Whether you’re daydreaming of a vacation home or an investment property, you might want to know how to afford a second home or how to buy a second home with no down payment.
If so, you’ve come to the right place. In this short guide, we’ll go over how to buy a second home without a down payment. As a homeowner, you have options, like a home equity loan alternative—but it’s important to know the risks and benefits of each as you start your search for a second property.
Can I Buy a Second Home Without a Down Payment?
The first question we have to answer is whether it’s even possible to buy a second property without a down payment. The short answer is yes. However, you can’t just walk into a bank and ask for a mortgage without a down payment requirement (well, you can, but chances are you won’t get a positive response).
The reality is that when we talk about how to buy a second home with no down payment, what we’re really talking about is how to buy a new home without having to take cash out of your savings.
Your options will depend on factors other than the balance in your checking and savings accounts. These include:
- Credit score – Your mortgage lender will check your credit score to determine the risk of loaning you money. You’ll likely need a score over 700 before most lenders will consider giving you a second home mortgage.
- Debt-to income ratio – Your debt-to-income ratio is another factor lenders use to determine whether to lend you money. The lower the ratio, the better. If yours is too high, you’ll either need to pay down some debt or find a way to raise your income before you’re likely to be approved for a loan.
If these factors both look good, you’re in a positive spot to secure a new and conventional mortgage. Next, we’ll look at some of the ways you can finance your down payment.
4 Ways to Buy a Second Home with No Down Payment
Finding a bank that will lend out money without a 20% down payment can be a difficult road.
Thankfully, your home equity gives you options for making a down payment.
Below, we’ll look at the pros and cons of four popular methods for providing the down payment required for your new mortgage loan.
1. Home Equity Financing
Tapping into the equity of your current home can give you access to cash. Two such ways you can do this are:
- A HELOC – A home equity line of credit (or HELOC) allows you to turn the equity in your current home into credit. Unlike traditional credit, HELOCs generally have a lower APR since they are backed by the equity in your current house. You can use this credit to provide the down payment for your second home.
- A Home Equity Loan – Similar to a HELOC, a home equity loan can provide you with cash for the equity you have in your current home. Unlike a HELOC, this cash is not in the form of a line of credit but is rather a lump sum loan which you will have to pay back. It thus functions as a “second mortgage” on your first home.
While both of these payment assistance options can work well to provide you with upfront cash to cover your down payment, you do need to be careful. Several risks factors apply:
- Both home loan types are subject to a payment mortgage lender approval, so factors such as credit and DTI will play a major role in whether these options are available to you and what interest rate you’ll pay.
- Taking out an equity loan isn’t exactly free. You’ll need to pay closing costs and appraisal fees. If you don’t have cash on hand to cover these costs, you may be able to roll them into your equity loan. Keep in mind that means paying interest on the additional sum.
- Because these loans use your first home as collateral, failure to pay them back could lead to foreclosure proceedings and the loss of that home.
2. Cash-Out Refinancing
Another payment assistance option that is similar to the above is a cash-out refinance.
Wondering how to do a cash-out refinance? A cash-out refinance replaces your existing mortgage rate with a new loan for a larger amount. Since this mortgage loan comes with new terms, it could potentially carry a lower interest rate, lower monthly payment, or a longer repayment period. You’ll have less equity in your first home, but the extra cash out will enable you to make a minimum down payment in a second.
In an ideal world, your refinance will allow you to access more favorable and conventional loan terms. However, there are potential disadvantages to consider:
- Poor terms – The goal is to find a lower interest rate than you presently pay. However, changing market conditions, a low credit score, or diminished income could have the opposite effect. You may end up with more interest and higher payments.
- Taking on debt – While this option does free up cash you can use to purchase a second house, you’ll owe more on your first house. Since you’ll also begin a new repayment period (often 30 years), you may be in debt for longer than you would have with your original mortgage.
3. Government-Backed Loans
Government-backed loans make it possible for some homeowners to purchase homes without a downpayment.
To use these, you will have to meet all eligibility requirements. The type of loans you may be eligible for include:
- USDA loans – USDA loans are 0% down loans that are given on certain USDA eligible tracts of land. Most of these locations will be in rural areas, though some are also available in suburban locations. However, USDA loans must usually be used on primary residences, so your new home may need to become your primary residence, making your current home into a secondary home. This could affect the terms of your current mortgage.
- VA loans – Current or former members of the military may be eligible for VA loans, which are also 0% down. Check the service time requirements to find out if you are eligible.
Want to access your equity without taking on more debt? A sale-leaseback program makes it possible to convert your home equity into cash which you can then use to purchase your second home.
This approach offers you a few advantages when purchasing your second home, including:
- The ability to make a strong offer – In today’s competitive market, nothing beats cash. Likewise, sellers often expect buyers to sacrifice traditional contingencies (for example, the option to back out of the deal without a penalty if your first home doesn’t sell). Since a sale-leaseback program removes your first mortgage from the equation, you’ll have cash-on-hand and zero risk of ending up with two mortgages.
- No interest – Most of the above options effectively add to your debt—and you’ll need to pay interest on the borrowed money. In contrast, selling your home allows you to pay off your mortgage and access earnest cash. That’s less debt and less interest.
- No risk of foreclosure – Since a sale-leaseback solution isn’t a loan, you won’t risk foreclosure. You simply stay on as a renter until you’re ready to relocate.
What to Consider
Now that you know how to buy a second home without a down payment, the next step is choosing the right option.
Before you start browsing listings, you need to take an honest look at your finances. Ask yourself the following questions:
- How much can you afford to make in a monthly mortgage payment?
- How much debt are you comfortable taking on?
- Could you stay current on all your debt if you lost your job?
- How will taking on a second mortgage affect your retirement plan?
- Is leasing one home a more practical option?
Weigh the pros and cons of each option against your financial situation to arrive at the best solution.
Get the Cash You Need with a Sale-Leaseback
Your home is probably one of the most valuable things you own. Being able to access your home’s value can be useful whether you’re buying a second home, thinking of moving, or just doing renovations that require cash. Sale-leaseback programs allow you to convert your home’s equity while staying in your home.
If you’re ready to turn your home’s equity into cash, consult a financial advisor to learn more.
Looking to purchase a second home but wondering how you can do so without the funds for a down payment? Learn more about your options in this guide. If you are still unsure of alternative options to purchase a second home and securing funds for a down payment after reading this article, consult a financial advisor to discuss your options.
- Chase. How to get a mortgage on a second home. https://www.chase.com/personal/mortgage/refinance/home-equity
- Chase. Beginner’s guide to cash-out refinance. https://www.chase.com/personal/mortgage/education/financing-a-home/guide-cash-out-refinances