Maybe you want to own a vacation home to use on the weekends and during holidays, or perhaps you're looking to purchase another piece of real estate to diversify your assets. There are multiple reasons that purchasing a second home may appeal to you and your financial situation. Here are a few tips to follow when taking out a mortgage to purchase a second home.

1. Make Sure Your Income Can Support Two Mortgages

The lending requirements for a loan for a second home are generally more strict than those for a primary mortgage. Most government-backed mortgages, like the FHA loan, aren't available for second mortgages. This means that you'll need to make sure your finances prove that you're capable of paying two mortgage payments.

Your lender will want all your monthly debt payments to be less than a certain percentage of your income. Though the exact percentage varies with each lender, the maximum percent for most lenders is 36 percent. This means that both your mortgage payments and your other debt payments need to be less than 36 percent of your gross income. For example, if you have a monthly gross income of $6,000, all your loan payments should be $2,160 or less. 

2. Understand the Costs Associated with a Second Home

There tend to be more costs associated with purchasing a second home. Since a borrower with two mortgages is more risky to the lender, you can expect them to require a bigger down payment.

Down payments for secondary homes must usually be around 20 percent of the home's purchase price. If you are able to find a lender who'll accept a down payment of less than 20 percent, be prepared to pay private mortgage insurance (PMI). PMI for second homes is usually more expensive than PMI for primary residences. 

You'll also need money to pay for the closing costs for your mortgage. Depending on the location of your home, the cost of property insurance may be more expensive, especially if the property is in an area prone to getting hit by hurricanes or other forms of severe weather. Make sure that you also include your annual property insurance bill and any funds required to set up an escrow account for your mortgage-related expenses.

3. Decide If You Want to Rent the Property

Should you decide you want to use the property to generate rental income, it's important to identify the home as a rental property when taking out a mortgage. Your lender may have more favorable loan terms for rental properties. When it's time to file your taxes, you may be able to use home-related expenses to offset your rental income. 

For more information, reach out to a home mortgage service.