Buying a vacation home can be a great way to build wealth and enjoy a second residence. But before you take the plunge, it's important to understand the financing requirements for a vacation home. Generally, lenders require a higher down payment and credit score for vacation homes than for primary residences. Additionally, you may need to consider the rental market in the area if you plan to rent out your vacation home.
When it comes to financing a vacation home, lenders typically require a higher down payment than for a primary residence. For example, conventional loans for primary residences allow down payments of up to 3%. But for a vacation home, you may need between 10 and 20%. Additionally, lenders may require a higher credit score and interest rates may be slightly higher than for prime home loans.
If you have equity accumulated in your primary residence, you may be able to borrow against the value of your home to maximize the borrowing power of your vacation home. Additionally, if you plan to rent out your vacation home while you're not using it, you should take the time to look at the rental market in the desired location. 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. Having a vacation property close to your primary residence can be an indicator that the intention of your vacation home is to rent it rather than for personal use, which would qualify the property under a different type of loan. Depending on the lender, up to 70% credit may be given to 75% of projected fair rents in the market (in Canada and the U.
S. Department of State, respectively) determined with an appraisal when purchasing a vacation home. Buying a vacation home may seem like a costly investment, but it can be worth it if you plan to rent it and collect passive income. Whether you're considering buying a vacation home now or in the future, there are steps you can take to make the process smoother. Unlike a first home mortgage, where the buyer can often finance themselves with as little as a 3% down payment, lenders will want to see a minimum of 10% on a secondary or vacation property.
