Second Home Financing Versus Investment Mortgages

In this blog, we will cover and discuss second home financing versus investment mortgages.  There are various reasons why homeowners want to purchase a second home. Fannie Mae second home financing has different mortgage guidelines than investment home mortgages. Investment home financing requires the following:

  • larger down payment
  • higher interest rates
  • require 6 months of principal, interest, taxes, and insurance as reserves

Fannie Mae Investment Home Mortgage Guidelines

Fannie Mae Investment Home Mortgage Guidelines

Investment home financing requires a 20% down payment. Second-home mortgage guidelines require a 10% down payment. Second-home financing mortgage rates are about 0.50% to 0.75% lower than investment mortgage rates. Second-home and investment property mortgage loans are conventional loans only. This is because FHA only allows owner-occupant primary residences only. Second-home and investment property borrowers need to meet conventional mortgage guidelines. Homebuyers of second homes must not just qualify personally but the second home distance requirements

Qualifying A Subject Property As Fannie Mae Second Home Financing

Second-home buyers need to make sure the potential purchase of the second home will qualify as a second home under Fannie Mae Second Home Financing Guidelines. A second home purchase cannot be too close to the homebuyer’s primary residence. The purchase needs to qualify as a second home. For example, here is a case scenario:

  • if a second home buyer primary residence is in Tampa, Florida
  • the home buyer wants to purchase another property in Tampa, Florida
  • buyer will have a tough time convincing lenders that the second home purchase will be used as a second or vacation home
  • the chances are that they will not qualify for a second home financing loan due to the close proximity to a primary residence

Difference Between a Second Home Versus an Investment Property
Difference Between a Second Home Versus an Investment Property

They can qualify for an investment property mortgage loan. However, as mentioned earlier, an investment property home mortgage loan requires a larger down payment of a minimum of 20%. Mortgage rates will probably be 0.50% to 0.75% higher than a second home mortgage rate.

Distance From Primary Home to Second Home Exceptions

If the second home buyer is purchasing a waterfront property that is close to the primary residence or in a resort-like Orlando nearby Disney World, then the deal will make sense as a second home. Another example that would classify as a second home is if the second home buyer lives in Illinois and plans on purchasing a home in Florida. This case scenario definitely makes sense. The second home buyer will have no problem qualifying for second home financing from any mortgage lender.

Eligibility Requirements For Second Home Financing Guidelines

Eligibility Requirements For Second Home Financing Guidelines

To qualify for second home financing, the home buyer needs a minimum of 10% down payment. Both the primary housing payment and second home housing payment will be included in calculating debt to income ratios. Maximum debt to income ratios is capped at 45%. Rental income or potential rental income cannot be used to qualify as additional income. Mortgage rates on second homes and investment properties are higher than rates on single-family homes.

Second Home Financing Purchase Strategy

Many folks who plan on retiring to Florida or California intend on purchasing their home there to retire and sell their existing home. However, if they retire, they may not qualify for a mortgage due to no income or limited income. Most retirees work part-time in a cash-paying job and get social security or pension.

Difference Between Primary Versus Fannie Mae Second Home Financing

Those who feel they will not qualify after they quit their jobs can see if they can purchase their retirement home as a second home while they are still working full time. Once they qualify for a second home mortgage loan, they can purchase the second home, retire, sell their home, and move into their second home and use it as a primary residence. Before quitting a job or giving notice to the employer they are retiring, please explore this option.

What If You Do Not Qualify For A Second Home Financing Due To High Debt To Income Ratios

In the event buyers do not qualify for second home financing due to high debt to income ratios, they can purchase a second home as an investment home with a 25% down payment. By financing it as an investment home with a 25% down payment, buyers can use 75% of the potential rental income towards debt to income ratio qualification. This is the case even if they do not have any tenants or do not intend to rent the home. Although buyers have to come up with a larger down payment and get a higher mortgage rate due to being an investment home mortgage loan, this can be an option in the event buyers cannot qualify due to high debt to income ratios

Fannie Mae Second Financing Guidelines Versus Primary Homes

Fannie Mae Second Financing Guidelines Versus Primary Homes

Second-home financing buyers currently living with family and do not own a home but want to purchase a vacation home or second home in a different area can do that. The same down payment and debt to income ratio requirements apply. 10% down payment and no greater than a 45% debt to income ratio.

Type of Mortgage Options on Fannie Mae Second Home Financing

Fannie Mae second home financing can only be financed through a conventional mortgage loan program. Government Loans (FHA, VA, USDA) are for owner-occupant home financing only. Fannie Mae and Freddie Mac are the two mortgage giants that set Second Home Financing Guidelines for Conventional loans. Second homes cannot be financed with FHA, USDA, or VA loans.

Fannie Mae Second Home Financing Guidelines on Conventional Loans

Fannie Mae Second-home financing guidelines state that second homes can only be financed through conventional. Second Home Buyers who do not meet Fannie Mae and/or Freddie Mac Guidelines can explore portfolio mortgage loans. Fannie Mae’s HomePath used to offer second home financing with a 10% down payment but HomePath Financing is no longer in existence

Fannie Mae Second Home Financing Guidelines on Down Payment Requirements

Under Fannie and Freddie Second Home Financing Guidelines, the minimum down payment required for second homes is a 10% down payment. Second-home financing is different than investment home financing. In investment home financing, the minimum down payment requirement is normally 20% to 25%. Single-family homes require a 15% down payment on investment property loans. With investment home financing, potential rental income can be used to qualify for the borrower’s income. Investment home mortgage rates are about 0.50% higher than primary and second home financing mortgage rates. Second-home financing mortgage rates are almost the same as primary home mortgage rates. Fannie Mae second home financing mortgage rates might be 0.125% or 0.25% higher than owner-occupied primary homes mortgage rates.

Fannie Mae Second Home Financing Guidelines: Credit Requirements On Second Homes

Credit Requirements On Second Homes

You can finance second homes and investment properties with the following loan programs:

  1. Conventional Loans
  2. Portfolio Loans
  3. Non-QM loans

Lender Overlays Versus Fannie Mae Second Financing Mortgage Guidelines

We just go off Fannie Mae and/or Freddie Mac Automated Underwriting System Approval. NO OVERLAYS. Second Home Borrowers need to qualify for Conventional loans:

  • 620 credit scores
  • Debt To Income Ratio up to 50%

Fannie Mae Second Home Financing Guidelines on Types of Properties

Any property with one to four units will qualify for conventional second home financing. The following properties are common second homes:

  • Single Family Homes
  • Town Homes
  • Condominiums
  • Two To Four Units
  • Non-Warrantable Condos
  • Condotel Units

Condotels and Non-Warrantable Condominiums need a portfolio loan program. Fannie Mae and Freddie Mac do not allow non-warrantable condos and condotel financing.

Fannie Mae Second Home Financing Guidelines on Qualifications To Be Classified as a Second Home

For homebuyers planning on purchasing a second home, there are certain qualification requirements in order to classify it as a second home versus an investment home. Being classified as an investment home will require more money down. Mortgage rates on investment home financing are much higher than they would be a second home financing. There are strict mortgage lending guidelines for it to be classified as a second home.

Fannie Mae Second Home Financing Guidelines on Distance Between Primary And Second Home

Fannie Mae Second Home Financing Guidelines on Distance Between Primary And Second Home

First, the second home needs to make sense. Let’s take a case scenario on how mortgage underwriters view second versus investment homes:

  • Homeowners who live in a 2,000 square feet home in Tampa, Florida
  • The homeowner wants to purchase a 2,000 square feet home in Clearwater, Florida
  • Distance from primary Tampa home to Clearwater is only 15 miles away
  • The mortgage underwriter will not buy that
  • The underwriter will underwrite the Clearwater, Florida mortgage loan application as an investment home
  • This will require a 20% down payment

Mortgage rates are 0.50% to 1.00% or higher than they would be for a second home mortgage loan.

Fannie Mae Second Home Financing Guidelines: The Importance Of Location To Be Considered Second Homes

However, if the Clearwater, Florida home were in a resort location such as the oceanfront or in a golf course community, it can possibly be considered a second home. Even though it is only 15 miles away from the owner-occupied primary residence in Tampa, Florida. A good example of second home financing would be if a second home purchase was in Miami, Florida, which is hours away from Tampa, Florida. Then it can be classified as a second home. Out-of-state home purchases can always be classified as second home financing due to the distance.

Qualifying For Second Home Financing with a Mortgage Company With No Lender Overlays

Second Home Buyers who need to qualify for second home financing with a mortgage company with no lender overlays can contact us at Capital Lending Network, Inc. at 800-900-8569 or text us for a faster response. Or email us at contact@capitalendingnetwork.com .


Peter has 7+ years of experience in residential lending. He is a licensed Realtor in the Chicagoland area.