When it comes to purchasing a vacation home, you'll need to be prepared to make a larger down payment than you would for a primary residence. Generally, you can purchase a primary residence with as little as 3 percent down payment, while for a vacation home, you'll need at least 10 percent. This is true even if the rest of your application is very strong (high credit score, low debt, etc.).Compared to prime home loans, vacation home loans tend to have slightly higher interest rates and lenders may require a higher credit score as well as a higher down payment. For example, conventional loans for primary residences allow down payments of up to 3%, while for a vacation home, you may need between 10 and 20%.
It's also important to remember that renting out your vacation getaway while you're not using it could violate the terms of your loan. You will be the owner of the property, so even if you rent your vacation home for part of the year, repairs and maintenance are yours. It's important to be clear about the distinctions between your primary residence and a vacation home. Unlike investment properties, you can't use future rental income to help you qualify for a vacation home. However, services like Airbnb make it easier for vacation home buyers to receive occasional rental income. A holiday home is one in which you will live personally for part of the year, but it will not be your main residence.
Financing a second home or vacation home has different rules than financing a primary residence. According to the 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. 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. A vacation home is generally defined as a secondary residence at least 50 miles away from your primary residence. Applying for a mortgage for a second home or holiday home is similar to applying for a primary mortgage.
If you're buying a multi-unit vacation home, lenders will almost always treat your purchase as an investment property, whether you plan to rent it or not. Conventional loans are often available for vacation homes, but mortgages for such properties are often accompanied by higher down payment requirements (at least 20%), higher interest rates, and more conservative lending guidelines. Since owning a vacation home means you won't be there all the time, you may need to hire someone to look after it during your absences or when you're between guests, if you rent it out.
