If you're considering a second home, you must have disposable income. Do you really want to invest your extra money in real estate? Take a good hard look at your life and goals and decide if buying a vacation home or investment property will best achieve them. Know these things before buying and read this primer for finding a second home.

• What do you want and need in a second home? A place where you can retire? A way to make extra income? Write down everything and create a wish list for your second home. Use this as a framework for what houses to look at.
• Ask yourself these questions:
  • How will you get to your second home? Do you prefer something within driving distance or in an exotic locale?
  • Will the location suit your future lifestyle? Do you want a community that caters to ages 55 and over, active/fitness or luxury?
  • How often will you go?
  • How will you get financing?
  • Will you need rental income to offset the monthly mortgage payment?
  • Can you afford the maintenance and insurance?
  • How will it affect your taxes?
  • How is the property appreciation rate in your desired location?
• Choose a location that meets the criteria on your wish list, or you may decide to hold off on buying. For instance, if you want a vacation getaway but don't expect to use it for more than a week each year, it doesn't make financial sense to buy. Consider fractional ownership or a timeshare.
• Consider sharing ownership of a second home. Research co-ownership options, such as a "tenancy-in-common" or "joint tenancy." If you don't feel comfortable dealing with strangers, buy with a family member or friend.

Assess your financial profile and credit score. Lending requirements are stricter for mortgages on second homes and the interest rate is typically higher than the rate on a primary home loan. Find out if you'll be able to qualify for a mortgage with terms you can handle.

• Calculate your debt-to-income ratio. Lenders want this to be 33 percent or less to qualify you for a loan. If your ratio is higher, pay down some bills.
• Increase your credit score. Lenders consider your credit history when determining your interest rate.
• Save for a down payment. Many lenders require at least 20 percent down on a second home.
• You may have to get a jumbo mortgage if you want a luxury home or plan to live in a very expensive housing market, like Los Angeles or New York City. Ask various lenders if you qualify for one.

In addition to a higher mortgage interest rate, a second home can come with extra expenses depending on where it's located and how frequently you expect to use it. For instance, you may need to hire a property manager or shell out more in insurance if it's in a hurricane-prone area. Make sure your income can cover it all.

• Remember, a mortgage payment covers PITI: principal, interest, taxes and insurance. A second home can easily mean bigger amounts of PITI. Plus, if your down payment is less than 20 percent of the total loan, you may need to pay for private mortgage insurance, or PMI.
• Find out how much home you can afford with this calculator. Use our mortgage calculator to figure out your monthly payment and total interest.
• Estimate your return on investment with this calculator.
• Calculate your buying costs, including closing costs and a down payment of at least 20 percent of the home price.
• Create a budget for monthly homeowner expenses, including costs of maintenance, heating and cooling, and a property manager if needed. Refresh your memory with this list.
• Depending on the location of your second home, you may be subject to higher costs of living, such as prices for groceries, restaurant dining and entertainment.
• If you're looking for an investment property, make sure you have "positive cash flow," meaning your expected income exceeds your expenses. Calculate how much you expect to earn in monthly income from renting out your property and subtract your monthly expenses. The resulting amount must be positive if you expect to profit from your purchase.

Depending on your credit score and financial situation, you may have several options for financing your second home. Keep in mind that lending requirements are stricter for vacation homes and investment properties than primary homes. Shop around for the best interest rates and terms.

• Get tips on financing your second home and figuring the tax impact. For instance, if you rent out the home for 15 days or more during the year, you have to report all rental receipts to the IRS as income, but you can also deduct operating expenses such as utilities, repairs, insurance and management fees against that income.
• Brush up on the different types of mortgages and check competitive interest rates online. Find out what kind of mortgage is right for you.
• Consider these alternative mortgages.
• Ask your current lender if they can offer you a low interest rate and favorable terms. They may be willing to negotiate to get more of your business.
• If you used a mortgage broker last time and were happy with the results, see if your repeat business will get you a great deal.
• Get started with Fannie Mae's Uniform Residential Loan Application and Freddie Mac's Mortgage Shopping Worksheet.
• Don't forget these basics of mortgage shopping:
  • Decide if you want to pay points. Which is better: a lower interest rate or lower closing costs?
  • Points are tax deductible, but closing costs are not.
  • Mortgage interest is also tax deductible.
  • Get Good Faith Estimates (GFE) from at least three lenders to really compare interest rates, closing costs and other fees.
  • Find out if there are prepayment penalties.
  • Ask lenders to give you a pre-approval letter.
  • Ask lenders about alternatives to paying PMI.
  • Look into a no-closing-costs mortgage and find ways to cut closing costs.
  • Consider locking in your interest rate if rates are constantly fluctuating. Ask your lender if they charge fees to lock in your rate.

If you're buying in a city that's unfamiliar to you, a local real estate agent will be a critical resource. Interview several agents with strong reputations in the area and who have experience working with second-home buyers. Ask family and friends who live in the area or contact professional organizations for referrals.

• Real estate agent. Choose a well-connected agent who is familiar with the neighborhoods you like and has experience with homes in your price range. Read the pros and cons of hiring a buyer's agent and get tips on shopping for an agent.
• Title company and closing agent. The title company searches and examines the title to make sure the seller actually owns the property and has the right to transfer the title to you, the buyer. It also ensures the title is "free and clear," and there are no other liens against the property. The closing agent coordinates the formal closing meeting and handles escrow.
• Appraiser. A state-licensed appraiser examines the home and researches comps and market trends to calculate the home's fair market value. An appraisal is required by the lender to ensure you're borrowing an amount equal to or less than the home's value. The cost of an appraisal can range from $300-$600, depending on the size of the home.
• Home inspectors. A standard home inspection covers all major mechanical systems, structural integrity, cosmetic features and other aspects of the home. It can help reveal potential problems that a seller may not disclose or be aware of. Find out how to find the right home inspector. You can also get inspections for termites and other pests or environmental hazards like asbestos, mold and radon.
• Homeowners insurance agent. Your lender requires proof of a valid homeowners insurance policy for the home, which you must secure before closing. Get quotes from at least three companies and pay the premium. This policy protects your investment (and the lender's) in the event of property damage, theft and even liability. Note that insurance costs are higher for second homes in tropical climates, in hurricane zones, near water or in the mountains.
• Real estate attorney. An attorney can provide valuable legal advice and review your purchase contract and real estate documents.

Once you've chosen a location, refer to your wish list to target homes to tour. Know what to look for and read the top 10 things to know about buying a second home.

• Research neighborhoods. Your motivation for buying a second home (pleasure, profit, whatever) will determine what neighborhood you choose. For instance, investors may focus on up-and-coming neighborhoods, while vacation homebuyers may stick with resort communities. Get to know the different types of neighborhoods and get tips on how to choose one that's right for you.
  • Ask yourself these questions:
    • Does it fit my goals and lifestyle?
    • How's the rental market? Will I be able to rent out the property when I'm not using it?
    • How convenient are shopping centers, nightlife, entertainment and other amenities?
    • What's the average appreciation rate each year?
  • If you're in the market for a vacation home, check out the local real estate market while you?re on vacation. Rent in the area for at least a year before you buy. Talk to the locals and visit during the off-season.
  • Look into these popular community types:
    • Urban living
    • Rural/country living
    • Resort living
• Choose a type of house. The type of house you choose (single family detached, condo, townhouse, duplex, co-op, etc.) depends on the level of home maintenance you want to handle and how much "common interest" you want to share with your neighbors. Each type of building and ownership comes with its own pros and cons, so choose one that fits your lifestyle.
  • Condos and townhomes are popular second homes because they offer turn-key living. No exterior repair worries or maintenance. But you are subject to homeowners association fees and rules.
  • New construction. Many builders and developers are offering generous incentives to get rid of excess inventory.
  • Prefabricated. Consider a luxury or eco-friendly prefabricated home. Not to be confused with your typical mobile home, these high-end modular homes offer a unique plush lifestyle.
• Decide which home features are most important to you. Look for these qualities of a great investment and ask yourself questions like these:
  • Do you like the outdoors? Porches, patios, decks, pool areas and verandas are ideal.
  • Do you plan to entertain guests? Look for homes with a gourmet kitchen, formal dining room and outdoor area.
  • Are you buying for retirement? Make sure the home's accessibility and layout will allow you to age in the place.
  • Do you have pets? You may want to narrow the field to homes with substantial backyards.
• Choose a style of house. Houses come in different architectural styles, from Victorian to modern to Cape Cod. Each has its own unique history, character and maintenance issues. Learn about 18 different home styles and find out your architecture personality. Upload photos of your own home and share your style with the FrontDoor community.
• See what's available online. Ask your agent to check the multiple listing service (MLS) for homes that fit your criteria. Browse more than three million homes for sale now. Sellers who go "for sale by owner" (FSBO) advertise online and in newspapers.
• If buying in a resort community, research the developer. Look into the developer's history to see what other properties the company has built. What's the track record? How long has the developer been in business? Strike up some informal chats with other resort owners to find out what insiders really think.
• Research the market where you want to buy. If it's a buyer's market where homes aren't selling quickly or sellers are cutting prices, you're in a much better bargaining position. If it's a seller's market, be prepared for possible bidding wars. Note the number of "for sale" and "open house" signs in your target neighborhoods. Pick up flyers and study listings online. How long have the houses been on the market? How "motivated" are sellers? Are sellers cutting prices?
• Look for bargains off the beaten path. Hire a buyer's agent or real estate attorney who specializes in these unique types of properties to walk you through the process.
  • Look for fixer-uppers in popular neighborhoods. They require a lot more sweat equity than a "move-in ready" home, but you can end up with a great home for half the cost. Look into rehabilitation and home improvement programs like the Department of Housing and Urban Development's (HUD) 203(k) Rehab Program.
  • Declining neighborhoods could easily become up-and-coming ones when they're categorized as revitalization or "empowerment" zones. Contact federal, state and local agencies that offer subsidies or other incentives if you buy in such zones.
  • Consider buying a stigmatized property.
  • Look into the foreclosure market. Learn how to buy a house in pre-foreclosure, at a foreclosure auction, or a bank-owned property.

Take your time during the home search. Resist the urge to impulse buy. Set up home tours and attend open houses. Keep track of each house with a house-hunting journal and digital camera. Rate each property on a scale of 1 to 10, with 10 being the highest.

• Take detailed notes of unusual features, design elements and incentives (i.e., furniture or appliances included, closing costs covered). Use FrontDoor's House Hunting and Open House Worksheet and the Savvy Woman's House Tour Feedback Worksheet.
• Read the Buyer's Field Guide to the Open House for tips on how to make the most of your Sunday house hunting.
• Look out for the Top 10 Red Flags for Homebuyers.
• Be critical and ask these questions:
  • What service providers (cable, Internet, telephone) are available in the area and is the house completely wired for each?
  • How much do you pay yearly in city and/or county property taxes?
  • How much do utilities run each month? Does the house use gas or electric for the furnace, water heater and appliances?
  • How old are the major appliances, and which are included with the house?
  • Have there been any major repairs to the house, and if so, when were they completed? For example, how old is the roof? Has water ever damaged the basement or foundation?
  • Ever had problems with insects, spiders or rodents?
• Scrutinize. Look inside cabinets, inside closets, at baseboards, at window casings, at door frames, where walls meet floors and ceilings. Look for any signs of damage, wear or poor construction.
• Find out what not to do while house hunting.

Once you find a home you want to buy, ask your agent to pull comps and prepare a Comparative Market Analysis. Remember, you are researching the prices and features of similar homes in the area that were sold within the past six months and homes that are currently on the market. FrontDoor.com offers "recently sold" and active listing information, or you can research local public records.

• Using comps, figure out the average cost per square foot for the area, and see if the home you want is in line with it. If it's higher, the house may be overpriced. Here's how:
  • Add up the square footage of 3-5 homes and divide by the number of homes to get the average square footage.
  • Add up the sold price of each home and divide by the number of homes to get the average price.
  • Divide the average price by the average square footage to get the average price per square foot.
  • Multiply that by the square footage of your home to get the price.
• Evaluate market trends, including whether homes in the area are selling for above or below the asking price (the list-price-to-sale-price ratio).
• Assess factors specific to the seller. A seller's need to sell gives you an advantage in the negotiating process.
  • Find out how much the seller paid for the house and what is left on the mortgage.
  • Is the seller "motivated," or eager, to get rid of the property? For example, is the seller relocating for a job or juggling two mortgages?
  • How many days has the home been on the market?
• Calculate the home's fair market value and come up with your offer price. Brush up on the steps to writing an offer and know the dos and don'ts of the negotiating process. Consider making a lowball offer in a buyer's market.
• Remember to define the following in your purchase offer:
  • proposed offer price
  • a breakdown of what is to be included in the sale (i.e. appliances, furniture, window treatments, fixtures)
  • contingencies -- terms that the sale is dependent on, i.e. secured financing, a satisfactory home inspection, the sale of the buyer's current home
  • provisions for disclosures of any defects that would affect the property value
  • seller concessions -- if the seller will be paying part or all of the buyer's closing costs; typically 3 percent or 6 percent of the price
  • earnest money amount -- a deposit toward the down payment, typically 1 percent of the price
  • proposed closing date
  • offer expiry date -- typically 24-48 hours after the offer is made
• An offer is more than just a price. If you want to pay less than the asking price, propose terms that will make your offer more attractive to the seller, such as a speedy closing, suggesting an "all-cash" transaction or buying the house "as is." Likewise, sellers looking for their full asking price may offer to pay points or closing costs, include a furniture or repair allowance, or leave the appliances, light fixtures and window treatments.
• Try these non-traditional financing options:
  • Seller financing -- If you decide to do this, work with a real estate attorney to make sure the contracts are legal and fair.
  • Mortgage assumption -- You take over the seller's mortgage payments.
  • Lease-to-own deal -- You are a tenant for a set period (usually one to three years) with some of the rent being applied toward a down payment.

If you're buying a condo or property governed by a homeowners association (HOA):

• Get a current copy of the HOA's covenants, conditions and restrictions (CC&Rs);
• Introduce yourself to the association president and ask to be informed of meetings so you're aware of what's going on in your community;
• Review the HOA's budget to see how your fees are spent;
• Consider setting up automatic debit payments for your monthly fees;
• Look out for special assessments by the HOA.

If you really want the house, be flexible, persistent and creative to get the deal done. If you and the seller are having trouble agreeing on terms, try these negotiating tips. After both sides are happy and have signed the agreement, remember these tips for closing:

• Avoid closing at the end of the month or the end of the year. You're likely to get better attention if you stay away from these very busy times.
• Set a move-in date. You and seller should agree on a date when you'll take possession of the home. Put the agreement in writing.
• Reserve funds for closing. You will need cash or a cashier's check for settlement costs (which can range from 2 percent to 6 percent of the loan) and your down payment, minus any earnest money you submitted with your offer.
• Work with the seller to ensure the appraisal, professional home inspections and necessary repairs are completed. Refresh your knowledge with Home Inspection 101. If you're buying the home "as is," you can still get an inspection to find out about any potential problems. But if you find something wrong, you are still contractually obligated to buy the property.
• Consider getting a home warranty policy to cover the cost of unexpected repairs or replacement of major systems and appliances. You pay for a year-long service contract, which ranges from $250 to $400, depending on coverage.
• Do a final walk-through of the house. Two days before closing, take a tour of the house to verify it's in the condition you expect it to be in. If you asked the seller to make any fixes or leave any appliances or furnishings as part of the purchase contract, check to make sure these were done.
• Review your estimated closing statement. Request a copy of the "HUD-1 Settlement Statement," which outlines the loan terms, exact amounts of money that will be exchanged at closing and how they will be disbursed, and total amount of funds you will need to bring to closing in the form of cash or a cashier's check. Review it carefully and look for any discrepancies with the Good Faith Estimate (GFE) you received earlier. If there are any errors, contact your lender.
• Bring documents to closing. Show a receipt as proof that you purchased homeowners insurance for the home and hand over the cashier's check for the down payment and closing costs.

Congratulations, you have a second home!