How To Buy A Second Home With No Or Low Down Payment

Buying a second home can be rewarding – but with great reward can often come significant upfront costs. Fortunately, you can save on those upfront costs with a low or no down payment home loan. While this strategy may have potential drawbacks, like needing to change your primary residence, it may be a worthwhile option if it lets you purchase a second home with little to no money down.

We’ll look at how to buy a second home with no or low down payment and explore alternative strategies for financing a second home.

Financing A Second Home Purchase: Can You Avoid A Down Payment?

Most of the time, you must furnish a down payment when you opt for a mortgage. In fact, you must often put down a higher down payment for a second home compared to your first.

If you’re considering a conventional loan, you must make at least a 10% down payment.

However, if you’re planning to make this new home your permanent residence, you can finance the second home without a down payment using a government-backed mortgage. This option requires you to make the second home your primary residence within 60 days of the purchase. Your current home could then become a vacation home or an investment property.

And this is just the beginning. There are additional mortgage loan options to explore to help avoid making a down payment on a second home, such as an assumable mortgage.

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.

Second Home Mortgage Lender Requirements

Lenders typically have stricter credit score, debt-to-income ratio (DTI) and cash reserve requirements for mortgages to finance second homes.

The credit score requirement varies by lender, but a credit score of 700 or above will help you qualify for a mortgage on a second home. If you take out a second mortgage to purchase a secondary home, experts recommend a DTI of 43% or less.

Disadvantages Of No Down Payment Options

Before you run out and apply for a low or zero-down mortgage, remember that you'll pay mortgage insurance if you make a down payment of less than 20% of the home loan.

The smaller your down payment, the higher your monthly mortgage payment because the mortgage insurance fee is tacked on to your mortgage payment every month.

The Bottom Line: Your Second Home Dreams May Be Within Your Reach

You can choose from several viable options to buy a second home with no money down. One option is to apply for a government-backed mortgage and turn the second home into your primary residence.

Other options include assuming a mortgage, tapping into your home equity or using the proceeds from a reverse mortgage. Making a low or no down payment will reduce your upfront costs, but it’s important to calculate the long-term costs of not making a down payment or making a smaller down payment.

If you’re ready to search for a second home, start your approval with Rocket Mortgage today.

¹Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 2/5/2024 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00. Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Schwab products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher priced loans are not allowed on properties located in New York. Additional restrictions apply. This is not a commitment to lend.