Buying a vacation home is a great way to create lasting memories with your family and friends. But it's important to understand the financing requirements before you start the process. Generally, you'll need to put down at least 10% of the purchase price in order to qualify for a loan. On your primary mortgage, you may be able to put a down payment of as little as 5%, depending on your credit score and other factors.
However, in a second home, you'll likely need to put in at least 10%.Because a second mortgage generally adds more financial pressure for a homebuyer, lenders often look for a slightly higher credit score on a second mortgage. The interest rate on a second mortgage may also be higher than that of your primary mortgage. Since FHA loans aren't an option for anything except for principal residences in the United States, you'll need conventional financing or a portfolio loan from a private lender. Either way, lenders generally require a 20% to 25% down payment on a second home to make it less risky for them. If you use the property as an investment property, you may be required to pay an even larger down payment.
A conventional loan or jumbo ARM loan may be available if you want to finance a vacation home and the home has a dollar value that exceeds compliant loan limits. According to the National Association of Realtors (NAR) Annual Vacation Homebuyer Survey, a home equity line of credit (HELOC) in a primary residence is a favorite source of financing for second-home buyers. The rise of Airbnb and similar services makes it easier for vacation home buyers to receive occasional rental income. Make sure your loan officer knows that you would like to finance your purchase as a vacation home and not as an investment property. If you're looking to buy a family home on vacation, chances are you'll need to get a mortgage for that property. If you have renters in your vacation home for more than 15 days a year, you'll need to report rent as income to the IRS. If you're having trouble qualifying for a vacation home loan when you first apply, try looking for a lender with more lenient requirements.
But financing a second home or vacation home has different rules than financing a primary residence. Some homeowners may choose to offset their expenses by renting their vacation homes when they are not using them. It's a unique tax benefit with some specific requirements that's becoming more common in real estate businesses, as homeowners are increasingly looking to switch to vacation homes. Potentially, you can still earn income with any of these options, renting your newly built vacation home, RV, boat, or tiny house to others for a weekend or longer. Consider these pros and cons with your family to help you decide if buying a vacation home is right for you. Before making any decisions, make sure that you understand all of the financing requirements and potential tax implications associated with owning and renting out a vacation home.
