8 min read May 09, 2024

How to Buy a Second Home Without a Down Payment

Does the thought of paying a down payment discourage you from owning a second home? Worry not. You can purchase a second home with little to no down payment.

However, you cannot skip a down payment as most lenders typically need it for mortgage financing. But you can avoid paying it using a few methods.

Here is our guide to know the four ways to buy a second home with no down payment.

🗝️ Key Takeaways

  • How to Buy a Second Home Without Down Payment? Apply for USDA, VA, FHA loans, use home equity, etc.
  • Leverage the Power of Equity: Use the accumulated equity of your existing home to pay for the second home.

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How to Buy a Second Home With No Down Payment?

Here are a few options to avoid a downpayment on a second home. Remember that purchasing a second home without financing is nearly impossible unless you have cash ready. But the following methods can help you skip the payment or delay it:

1. Get a Loan

Apply for USDA or VA loan to pay the down payment for a second home. These loans offer 0% down payment options to eligible candidates.

Note that, you cannot qualify for these loans to purchase a second home. If you make the second home your primary residence, only then you can be eligible for government-backed loans.

Once you turn it into your primary home, check whether you qualify for the USDA, VA, and FHA loans. Understand the three different loans as they have strict conditions for qualification:

–> VA Loans

Individuals who are serving or have served in the military can apply for veteran loans. The central selling point of the VA loan is the zero-down payment feature of the loan. Eligibility is an essential factor in obtaining a VA loan for a second home.

25% of veterans do not apply for the loan due to the fear of disqualification. But once eligible, veteran homebuyers can easily skip a downpayment for a second home.

» Also Read: VA Loan for Investment Property: Can you use it?

–> USDA Loans

This is a loan that offers a 0% down payment option to properties in rural regions. The United States Department of Agriculture also has strict parameters to choose the right candidate.

The loan is usually for rural homes, but some urban homes can qualify for USDA loans too. Potential home shoppers can benefit immensely if they manage to fulfill all conditions.

–> FHA Loans

FHA loans are government-funded loans with lenient qualification criteria. Federation Housing Administration provides the funds for these loans to qualified people.

If you wish to apply for the FHA loan, then you cannot buy the 2nd home as an investment property. You have to make it your primary residence and move-in within 60 days of closing.

» FHA Gift Funds: Read to know more.

2. Use Home Equity

You can use a home equity loan to buy another house if you have accumulated a sizable equity. To apply for an equity loan you need to use your home as collateral for a second home.

There are plenty of benefits to using equity to buy a second home with no down payment. Let’s have a look at some of them:

  • An equity loan taken from existing equity has a fixed interest. It is far more affordable and relatively easy to pay back.
  • You get direct access to the equity loan once you qualify for it.
  • You can use home equity to purchase a new primary residence or an investment property.
    🤔 Consider Cash-Out Refinance to Buy Your Second Home

    –> If you have equity in your primary home, you can do a cash-out refinance for a higher amount. Use the additional funds for the down payment on your second home.

3. Consider Rent-to-Own Options

Rent the property to purchase it in the future. This allows you to pay the down payment gradually in rent.

For the transaction, you need to draw up a rent-to-own agreement. The agreement specifies all the information to allow you to purchase the home in the future.

Home buyers who are not in a hurry to own a home can opt for this method. You do not have to pay the down payment by renting a place immediately.

4. Purchase From a Close Relative

A relative can offload their home to you at an economical price. They can instead also offer equity as a present to buy a second home.

Willing and capable family members can gift you the funds for the down payment. However, lenders have guidelines regarding gift funds.

    🎁 What are Gift Funds in Real Estate?

    –> Gift funds are funds given to a home buyer to cover a down payment or closing costs. A donor has to provide a gift letter that includes their information and a declaration that states it is a gift not a loan.

Remember, while the above options exist, they may not be available or suitable for everyone. It’s advisable to consult with a mortgage professional or financial advisor. They will help you explore specific options and requirements based on your circumstances.

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Is It a Good Idea to Buy a Second Home With No Down Payment?

No, buying a second home with no down payment is not a good idea. Because while purchasing a home, you cannot wholly skip a down payment. You can find ways to delay the payment through loans and gift funds. But you cannot ignore it.

Over a period of time, you may accumulate a larger debt. If you use home equity to fund your purchase, you risk your existing home.

A mortgage professional can help you with down payment assistance. Their professional advice will ensure the venture is not risky.

👍 Pros of Buying a Second Home With No Down Payment

  • Potential Investment Property: Rent out the second home or flip it or wholesale it. You can earn a passive income using the second home as an investment property.
  • Less Financial Burden: You can relax and enjoy homeownership without the looming fear of paying the down payment. In case, you use a home equity loan to fund the purchase the interest rate will be fixed. Your expenses will be manageable.
  • Considerable Tax Benefits: You can apply for tax deductions on your second home if it’s personal or rental property. But, you cannot qualify for tax deductions if you use your equity to pay for the second home.

👎 Cons of Buying a Second Home With No Down Payment

  • Lenders May Charge High-Interest Rates: Mortgage lenders charge a higher interest rate as buyers may stop. As a buyer, you are more likely to pay the mortgage on your primary residence than your second home.
  • Risk of Losing Your First Home: If you do not settle your dues on time, you risk losing your first home to foreclosure.
  • Can be More Expensive Than Anticipated: If you apply for a conventional loan to purchase a second home, then paying it off can be taxing. Additionally, if you have taken a conventional loan then you’ll have to pay the PMI too.

Conclusion

Home buyers can purchase a second home with no downpayment by applying for loans or asking for gift funds. However, you cannot truly skip a down payment while purchasing a home.

In fact, without a down payment lenders may impose higher interest rates. They may also charge private mortgage insurance (PMI) fees, or extend the loan term, ultimately increasing the overall loan expense.

It is crucial to consider the financial implications carefully and consult a mortgage professional to make an informed decision.

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Frequently Asked Questions

1. Can you buy a house without a down payment?

Yes, you can buy a second home with no money down. You can apply for cash-out refinance or gift funds to avoid the down payment required for second home.

2. How to buy a second home with no money down?

You can try financing a second home by applying for government-backed loans or using home equity.

3. Do I have to put down 20% on a second home?

Yes, you have to put down 20% on second home when you take a conventional loan. But you can avoid paying this 20% by applying for government-backed loans.

4. Are mortgage rates higher on a second home?

Yes, mortgage rates are slightly higher on a second home. It is higher because there is high risk of people backing out and not paying the second mortgages.

Related: 2nd time home buyer no down payment, how much down for a second home, second home down payment requirement, how much down payment for second home, second home mortgage down payment, down payment on second home, downpayment for second home, minimum down payment for second home conventional loan

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