Get Expert Financing
- Matched with investor-friendly lenders
- Fast pre-approvals-no W2s required
- Financing options fro rentals, BRRRR, STRs
- Scale your portfolio with confidence
Buying a second home or an investment property can be a smart financial move, but the financing rules for each can vary significantly. Understanding these differences can help you choose the best option for your financial goals. In this guide, we’ll break down the financing differences between second homes and investment properties, along with the pros and cons of each.
What Is a Second Home?
A second home is typically a property you use for personal vacation, family gatherings, or as a seasonal retreat. It’s not your primary residence but still serves as a personal getaway, often in a different location from your main home.
Financing for a Second Home
Financing a second home can be more straightforward than an investment property. Here’s why:
- Lower Interest Rates: Second home mortgages often have lower interest rates than investment property loans, as lenders perceive them as lower risk.
- Lower Down Payments: You might only need a 10-20% down payment, depending on your credit profile and lender requirements.
- Simpler Approval Process: You can often qualify based on your personal income without needing to show rental income.
Pro Tip: Use a mortgage affordability calculator to estimate what you can afford before you buy.
Key Requirements for Second Home Financing
To qualify for second home financing, lenders typically require:
- The property must be occupied by the owner for at least part of the year.
- The home must be a reasonable distance from the primary residence.
- The borrower must have strong credit and stable income.
- The property cannot be a rental or timeshare.
What Is an Investment Property?
An investment property is a real estate asset purchased to generate rental income or profit from appreciation. It can include single-family homes, multi-family units, condos, or commercial properties.
Financing for Investment Properties
Investment properties come with more stringent financing rules because they are viewed as riskier by lenders. Here’s what to expect:
- Higher Interest Rates: Investment property loans generally have higher interest rates than primary or second homes due to increased risk.
- Larger Down Payments: Expect to put down 20-30% or more.
- Stricter Underwriting: Lenders often require proof of rental income, higher credit scores, and significant cash reserves.
Pro Tip: If you’re considering a short-term rental, check out this guide on investment property HELOCs for financing flexibility.
Popular Financing Options for Investment Properties
- DSCR Loans: Loans based on the property’s income rather than your personal income. Learn more about DSCR loans and how they work.
- HELOCs: Use the equity in another property to finance your investment.
- Bank Statement Loans: Ideal for self-employed investors. Find out if this option suits you here.
Key Differences Between Second Home and Investment Property Financing
| Feature | Second Home | Investment Property |
| Down Payment | 10-20% | 20-30% or more |
| Interest Rates | Lower | Higher |
| Rental Income Requirement | Not required | Often required |
| Credit Score | Typically 620+ | Typically 680+ |
| Occupancy | Personal use | Rental income focus |
Choosing the Right Option for You
Deciding whether to buy a second home or an investment property depends on your financial goals and personal circumstances. If you want a vacation spot for personal use, a second home might be best. If you’re looking to build long-term wealth through rental income, an investment property could be the way to go.
FAQs
Can I use a second home as a short-term rental?
It depends on the lender’s guidelines and local zoning laws, but many second home mortgages restrict this.
What’s the minimum credit score for an investment property loan?
Generally, you’ll need a credit score of at least 680, though some programs may accept lower scores with higher down payments.
Read Next
Ready to Take the Next Step?
Use our Loan Comparison Calculator to see which option might be best for you or get personalized guidance from our expert loan advisors.
Get Expert Financing
- Matched with investor-friendly lenders
- Fast pre-approvals-no W2s required
- Financing options fro rentals, BRRRR, STRs
- Scale your portfolio with confidence
Our advice is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.
