If you already own a home and want to buy another, you have four realistic funding paths: a new conventional mortgage, a loan against your current home’s equity, a short-term bridge loan, or a loan from your 401(k). Which combination fits depends on two things: whether the new property will be a second home or an investment, and whether you plan to buy before you sell. Both answers shape your down payment, your interest rate, your reserves, and the legal exposure you take on. Figuring out how to buy another house while owning a house is less about finding money and more about matching the right financing to the right classification before you make an offer.
Second Home or Investment Property
Lenders and the IRS treat these as different products, and the label follows the loan for its entire life. A second home is one you personally use for part of the year, like a vacation house or a weekday place near a second job. Under Fannie Mae guidelines, it must be suitable for year-round occupancy, you must keep exclusive control over it, and it cannot be run as a rental managed by a third party.1Fannie Mae. Occupancy Types
An investment property is one you buy to generate rental income or hold for appreciation. If you plan to rent out your current home after moving, that departing residence becomes an investment property in your lender’s eyes, even though you bought it as a primary residence.
Do not call an investment property a second home to shave your rate. That is occupancy fraud, a federal crime carrying fines up to $1,000,000 and up to 30 years in prison.2Office of the Law Revision Counsel. 18 USC 1344 – Bank Fraud A lender that catches the misrepresentation can also accelerate the full balance and start foreclosure.
Conventional Loan Requirements for the New Property
Conventional mortgages backed by Fannie Mae are the most common route, and the requirements are tighter than they were on your first home. The terms scale with risk.
Down Payment
Fannie Mae allows a maximum loan-to-value ratio of 90% on a second home, so you need at least 10% down on a single-unit property. Investment properties require more: at least 15% down for a single unit and 25% for a two- to four-unit building.3Fannie Mae. Eligibility Matrix – December 10, 2025 These are the floors. Putting 20% or more down on a second home removes private mortgage insurance and opens up better pricing.
Credit Score and Debt-to-Income Ratio
Lenders generally expect a FICO score around 680 for a second home, though borrowers with larger down payments and lower debt ratios may qualify as low as 640. Scores above 740 usually get the best rates. Your debt-to-income ratio has to include both mortgages (current and proposed) along with every other recurring obligation. Fannie Mae’s automated underwriting can approve ratios up to 50% when credit and reserves are strong, but keeping the combined ratio under 45% makes approval cleaner.4Fannie Mae. Debt-to-Income Ratios
Reserves
Reserves are the liquid assets you have left after closing, counted in months of mortgage payments. Fannie Mae requires at least two months of reserves for a second home and six months for an investment property. Checking and savings, brokerage accounts, CDs, and vested retirement balances all count. Funds you can only access at retirement, termination, or death do not.5Fannie Mae. B3-4.1-01, Minimum Reserve Requirements The automated underwriting system may ask for more depending on the overall file.
Interest Rate
Expect to pay a premium. Second home rates typically run 0.25% to 0.50% above primary residence rates, and investment property rates generally sit 0.50% to 0.75% higher. On a $400,000 loan, a half-point adds roughly $120 per month.
Why FHA and VA Loans Usually Will Not Work
If you used an FHA or VA loan on your current home, those programs probably will not finance the new one. FHA loans require you to occupy the property as a primary residence within 60 days and keep it that way for at least a year. A second FHA loan is possible only in narrow situations like a job relocation or family size change, and the new home still has to become the primary residence. VA loans carry the same primary-residence requirement with a 60-day occupancy rule and cannot be used for second homes or investment properties. For most buyers in this situation, the conventional market is the only realistic path.
Using Your Current Home’s Equity
If your current home has appreciated or you have paid down the balance, that equity can fund part or all of the new down payment. Three vehicles do the work, and they behave differently.
Home Equity Line of Credit
A HELOC is a revolving credit line secured by your current home, typically up to 80% or 85% of the appraised value minus the existing mortgage balance. On a $500,000 home with a $300,000 mortgage, an 80% combined limit opens up to $100,000 of accessible equity.3Fannie Mae. Eligibility Matrix – December 10, 2025 You draw only what you need and pay interest only on what you draw. The rate is variable, so payments can rise, and the new lender will count the HELOC payment in your debt-to-income ratio.
Home Equity Loan
A home equity loan is a fixed-rate second mortgage. You take the full amount at closing and repay in equal installments. Same loan-to-value limits apply. You get payment certainty, but you pay interest on the full balance from day one.6Fannie Mae. Uniform Residential Loan Application
Cash-Out Refinance
A cash-out refinance replaces your existing mortgage with a larger one and hands you the difference. Fannie Mae caps the loan-to-value at 80% for a cash-out refinance on a primary residence.3Fannie Mae. Eligibility Matrix – December 10, 2025 On that same $500,000 home, you could refinance into a $400,000 mortgage and net about $100,000 after closing costs. The trade-off is resetting your term and possibly accepting a higher rate than the one you already have. If you locked a low rate recently, a HELOC usually costs less in the long run.
Three-Day Right to Cancel
Federal law gives you three business days after signing to cancel any loan secured by your primary residence. That rescission window applies to HELOCs, home equity loans, and cash-out refinances. Build it into your closing timeline if you need the funds on a specific date.
Bridge Loans When You Need to Buy First
When the new home has to close before the current one sells, a bridge loan covers the gap. Terms generally run six to twelve months, with some lenders offering as short as three. Most bridge loans require interest-only payments during the term and a balloon payment when your old home sells.
The cost is high. Rates generally land in the 8% to 12% range, and origination fees add another 1% to 2% of the loan amount. Lenders usually want either a signed listing agreement on your current home or a purchase contract on the new one, and underwriting focuses on the exit strategy: how confident is the lender that your current home sells inside the loan term.
The payoff is leverage. A bridge loan lets you make a non-contingent offer, which sellers in competitive markets prefer. The risk is real: if your current home sits unsold past the term, the lender can foreclose. Bridge loans fit best when the departing home will clearly move fast. They are a poor fit when the sale timeline is uncertain.
Borrowing From a 401(k)
If your plan allows loans, you can borrow up to 50% of your vested balance or $50,000, whichever is less.7Internal Revenue Service. Retirement Topics – Plan Loans If 50% of your vested balance is under $10,000, some plans let you borrow up to $10,000.8Internal Revenue Service. Retirement Plans FAQs Regarding Loans
A 401(k) loan is not a withdrawal, so repaying it on schedule avoids income tax and the 10% early distribution penalty. Standard repayment runs five years with at least quarterly payments. If the new home will be your primary residence, the plan can extend that period beyond five years. The extension does not apply to a vacation home or investment property; the five-year cap stands in that case.7Internal Revenue Service. Retirement Topics – Plan Loans
Here is where it gets dangerous. If you leave your job or miss quarterly payments, the outstanding balance is treated as a distribution. You owe income tax on the full amount plus the 10% penalty if you are under 59½. A $50,000 loan that flips to a distribution can cost $15,000 or more in taxes and penalties. Treat this as a last resort, not a first choice.
Qualifying With Rental Income From Your Current Home
Planning to rent your departing residence? Projected rent can help offset the old mortgage payment in your debt-to-income calculation. Lenders count only 75% of the gross monthly rent; the remaining 25% is assumed to cover vacancy and maintenance.9Fannie Mae. Rental Income
First-time landlords face a catch. If you have no documented property management experience, meaning no Schedule E on a prior tax return showing rental income with 365 fair rental days, Fannie Mae restricts how the rental income can be used. It can only offset the payment on the departing residence itself; it cannot boost your overall qualifying income. Borrowers with documented landlord experience face no such limit.
To support the projected income, you need a fully executed lease and evidence the tenant has paid: two months of consecutive bank statements showing the deposits, or copies of the security deposit and first month’s rent with proof of deposit. If you do not have a tenant yet, a rental appraisal on Fannie Mae Form 1007 can establish market rent from comparable properties.9Fannie Mae. Rental Income
Gift Funds Toward the Down Payment
Family gift money can help on a second home purchase but is not allowed on an investment property.10Fannie Mae. Personal Gifts For second homes, the rules depend on how much you are borrowing:
- At or below 80% LTV, the entire down payment can come from gift funds, with no minimum contribution from your own money.
- Above 80% LTV, you must contribute at least 5% of the purchase price from your own funds. Gift money can cover the rest of the down payment, closing costs, and reserves.
If you are putting down the minimum 10% on a second home, your LTV is 90%, which triggers the 5% own-funds requirement. Keep documentation showing the source and transfer of any gift, because lenders trace every dollar.
Insurance Changes to Plan For
Your current homeowner’s policy covers a home you live in. The moment you move out and rent it, that policy no longer applies. You need a landlord policy, which covers the structure and your liability but not the tenant’s belongings. Landlord policies typically add loss-of-rent coverage for periods when the property is uninhabitable during repairs. Landlord insurance generally costs about 25% more than a standard homeowner’s policy because rental properties carry higher risk.
The new home needs its own policy too. If it is classified as a second home, some insurers charge a slight premium because the property sits vacant for parts of the year. In coastal or wildfire-prone areas, finding coverage at all can be expensive and slow. Budget for both policies before closing, because lenders will not fund the loan without proof of insurance.
Taxes and Carrying Costs Across Two Homes
You can deduct mortgage interest on your main home and one additional qualified residence, but the combined mortgage debt eligible for the deduction is capped at $750,000 for loans taken out after December 15, 2017 ($375,000 if married filing separately). Mortgages originated on or before that date fall under the older $1,000,000 limit.11Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction If your combined mortgages exceed the applicable threshold, only the interest on the amount within the limit is deductible.
If you convert the current home to a rental, you must begin depreciating it on a straight-line basis over 27.5 years using the Modified Accelerated Cost Recovery System. The depreciable basis is the lesser of the home’s fair market value on the conversion date or your adjusted basis (what you paid plus improvements, minus any casualty losses). Annual expenses like property taxes and insurance get split between personal-use and rental portions of the year based on when the conversion happened.12Internal Revenue Service. Publication 527 (2025), Residential Rental Property Depreciation you claim or should have claimed reduces your cost basis at eventual sale, so part of your gain will be taxed as depreciation recapture at up to 25%. Talk to a tax professional before you convert, not after.
If you later sell the current home, you may exclude up to $250,000 in capital gains ($500,000 for married couples filing jointly) if you owned and used it as your primary residence for at least two of the five years before the sale.13Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence The two-out-of-five window keeps running after you move out, so waiting too long to sell a converted rental can cost you the exclusion.
Coordinating the Two Closings
When you buy before you sell, the purchase closes first, funded by whatever mix of mortgage, equity, bridge loan, or retirement plan loan you have arranged. Closing costs on the new home typically run 2% to 5% of the purchase price. A single delayed wire can push back the whole settlement, so clear coordination between your lender, title company, and any bridge loan servicer matters.
A sale contingency in your purchase offer makes the new deal depend on closing the current one. It protects you financially but weakens the offer in a competitive market. If the seller rejects the contingency, you need to be ready to carry both properties: two mortgage payments, two insurance premiums, two property tax bills, utilities, and maintenance on both homes. Add it up before you offer, because the number is usually higher than people expect.
When both transactions line up close together, the payoff from selling your old home can reimburse the bridge loan, rebuild reserves, or pay down the new mortgage. Build a two- to four-week buffer between your planned sale date and your financial obligations on the new property. Home sales fall through or slip more often than buyers expect, and the buffer is what keeps a delay from turning into a default.