Strategies For Buying A Second Home Without A Down Payment
Let’s explore no and low down payment strategies with government-backed loans and alternative loan options and approaches to financing a second home.
Government-Backed Loans
Government-backed loans offer no and low down payment options, but you can’t use them to buy a home you don’t intend on using as your primary residence. For some buyers interested in purchasing a second home, a government-backed loan won’t work. But if you're willing to move and want to hold on to your current home as an investment property or second home, you can benefit from a government-backed loan.
You can use a U.S. Department of Agriculture (USDA) or Department of Veterans Affairs (VA) loan to purchase a second residence for 0% down, then convert your current residence into a vacation home or rental.
USDA Loan
You can get a USDA loan with 0% down if you meet the loan’s eligibility requirements, including that the property you want to buy is in a USDA-approved area, which is primarily rural. You may even qualify for a USDA loan for a home in some suburban areas.
Please note that Rocket Mortgage® doesn’t currently offer USDA loans.
VA Loan
To qualify for a VA loan – which doesn’t require a down payment – a borrower must be an eligible activity-duty service member, a retiree of the U.S. Armed Forces, a veteran or a surviving spouse.
You can get a one-time restoration of your full VA entitlement once you’ve paid off your previous VA loan, allowing you to use your VA loan to purchase a second house.
Assumable Mortgage
If the home seller has a Federal Housing Administration (FHA) or VA mortgage, they may have an assumable mortgage. In that case, you can take over the seller's mortgage. When you assume a mortgage, you don’t make a down payment. This option may be attractive to home buyers if interest rates have risen since the seller bought the home, and buyers want to take advantage of the seller's lower interest rates.
Check with your lender to see if you can assume a mortgage. They may have reserved the right to approve the assumption.
Tapping Home Equity
Homeowners can use a cash-out refinance, home equity line of credit (HELOC) or home equity loan1 to convert their home equity into money they can use to buy a second property. However, the 2017 Tax Cuts and Jobs Act eliminated the mortgage interest deduction on home equity loans unless you use the proceeds for qualified home improvements.
Reverse Mortgage
If you’re at least 62, consider using the proceeds from a reverse mortgage to pay for your secondary residence.
With reverse mortgages, owners must live in their primary residence for more than half the year. However, you may qualify to temporarily live in another residence for just under 6 months, so owning a second home isn’t ruled out. An example of this could be buying a second home in Florida to live in for the winter months, then living in your primary residence in Michigan during the spring, summer and fall.
While you can use your proceeds from a reverse mortgage to pay for the down payment or entire home, a reverse mortgage is a complicated and expensive loan. You may be able to roll the high closing costs of a reverse mortgage into the loan, but it could end up costing you more to get this loan than a down payment may.
And just because you don’t have to pay the loan until you pass away, move out or the residence is no longer your primary one, the loan (plus accumulated interest) will come due eventually. In that case, you or your heirs will either need to sell your home, refinance the loan into a regular mortgage or leave the home to the lender. It’s also important to remember that, while there isn’t a required mortgage payment, you will be responsible for paying property taxes, homeowners insurance and home maintenance costs.
It’s recommended you speak to a loan expert or financial advisor before choosing this loan option. And please note that Rocket Mortgage doesn’t currently offer reverse mortgages.
A Family Member Gifts Home Equity
A gift of equity can offer three advantages: You can finance the second home with no down payment. You don’t need to make the new home your primary residence. And lastly, the seller, typically a family member, may sell you the home below market value and gift the remaining equity. As the gift recipient, the gift isn’t taxable, but the gift giver may pay taxes on the gift amount.
For example, if you buy your cousin’s house for $150,000 instead of its $350,000 fair market price, the down payment is essentially covered by the gift of equity you’re receiving in the home, which is $200,000.
