Buying a Second Home? Make Sure You Are Prepared

buying a second home

buying a second home

So, I’m in the middle of buying a second home. This will be a vacation home — basically, a place for a weekend getaway. It’s a nice little 2-bedroom cottage that was recently remodeled, located in the mountains of PA, approximately two hours away from home. We threw out a low-ball offer, and the owner accepted, as it’s been on the market awhile and he wanted to unload it.

I am going to attempt to obtain financing for this venture. Because it’s a second home, most people will probably view this purchase as a pure “want” and advise that I pay cash.

But, there is a twist. 

The plan is to rent it out during the times that we aren’t using it. It’s located in a good area with river access, plenty of hunting, fishing, and outdoor activities year-round. Based on researching other rentals in the area, this place should turn a decent profit. At the very least, it will pay for itself and give us essentially a “free” cabin.

This isn’t a done deal, and there are a lot of criteria that the lenders look at before granting financing on these cabins. There is a chance that this could fall through, but I’m going to stay optimistic and assume it will go through without any issues. Lending for a second home is quite different from lending on a primary residence, so I wanted to share what I’ve learned so far about the process.

What You Should Know About Buying a Second Home

First, buying a second home is more difficult and involved than buying a primary home. It’s a simple matter of risk. The bank is operating under the assumption that if times get tough, you’re going to default on the second home as opposed to your primary residence. Because of this, the criteria for obtaining financing is much more difficult.

So far, we’ve submitted the following:

  • Two years’ worth of tax returns;
  • Three months’ worth of all banking statements;
  • A full listing of all assets including vehicles;
  • A month of pay stubs; and
  • Completed a mountain of paperwork.

And we still have to wait for the appraiser to give the property their blessing.

The Effects of the 2008 Housing Market Crash

The realtor we’ve been working with told us since 2008, the banks are reluctant to extend financing on second homes in this area. The home must be on a certain type of foundation, either a full basement or on a full block crawl space. The home must be stick built. There needs to be a primary heat source that provides heat to the entire structure. The road must have winter maintenance and full year-round access.

Before 2008, none of this mattered, but since the Great Recession, the banks have tightened up lending standards to the point that financing for a second home is nearly impossible. Most of the cabins in the area are cash deals, since it is almost the only way to purchase.

How I’m Going to Pay for the Second House

So, what am I going to do? My plan is to cash-out refi my primary house and use the proceeds to essentially do a cash deal on the cabin. However, I wouldn’t recommend doing this unless the numbers work in your favor. Here is how it played out in my case.

I am going to roll my mortgage and HELOC into a new loan, and will have enough cash left over to pay for the cabin outright. I will be eliminating PMI and shaving seven years from my mortgage in the process. My payment will be about the same as it is now, which in my opinion, isn’t a bad deal.

I’m operating under the assumption that I will get nine months of usage out of the camp and will be able to do weekend rentals every other weekend during that time. Gross rent will be somewhere around $4,000 for the season. Some quick and dirty math tells me that I’ll end up slightly ahead — we’ll have a free camp to use every other weekend all season long.

What If It Isn’t Profitable? Benefits Either Way

Buying a second home isn’t easy. I’m sure some unforeseen circumstances and expenses will arise, but we’re going for it. I’m still going back and forth with the bank and ironing out all the details, but I should have an update soon. At the very least, even if this place doesn’t turn a profit, we’ll still have a home for a weekend getaway, and I’m knocking several years off my primary mortgage and eliminating PMI. I’ll post an update on this soon.

Have you purchased a second home? Share your experience with us in the comments below!

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