Banks calculate second home loans by evaluating the borrower's financial stability, property valuation, and risk factors specific to non-owner-occupied properties. Key steps include assessing the applicant's debt-to-income (DTI) ratio, which combines existing debt and the new loan payments, typically requiring a DTI below 43% for conforming loans. The loan-to-value (LTV) ratio is also critical, often capped at 80% for primary residences but reduced to 70% for second homes to mitigate risk. Banks review the property's appraised value, comparing it to local market data and ensuring it meets conforming loan limits ($765,800 in 2023). Additionally, lenders verify the borrower's ability to cover property expenses, including taxes, insurance, and maintenance, which are higher for investment properties. Second home loans typically carry higher interest rates than primary mortgages, reflecting the increased risk of default due to the property's non-occupancy status.

Banks impose stricter criteria for second home loans because non-owner-occupied properties pose higher default risks. Data from the Federal Housing Finance Agency (FHFA) shows that delinquency rates for investment properties were 2.8% in 2022, compared to 1.5% for owner-occupied homes. This disparity arises because investors may prioritize liquidating other assets before defaulting on a second home, reducing the likelihood of repayment. Furthermore, the higher LTV cap and down payment requirements (often 20% for second homes versus 5-10% for primary residences) reduce the borrower's equity stake, cushioning losses for lenders if the property must be sold under duress. The FHFA also notes that 35% of second home purchases in 2023 were by investors, amplifying systemic risk. By tightening underwriting, banks align with regulatory mandates to minimize exposure to volatile real estate markets and ensure sustainable lending practices. These measures collectively balance risk mitigation with market demand, ensuring lenders remain solvent while accommodating secondary property financing.