Financing a Vacation Home

Written by Posted On Wednesday, 30 January 2019 05:30

Lenders assign various levels of risk based upon different factors such as the type of property being financed, credit scores of the borrowers and how much down payment is involved, for example. Another important element is whether or not the owners of a property occupy the home full time, part time as in a vacation or second home, or as a rental property.

A primary residence is one where the owners live in the home full time, year round. A second home, which is typically a vacation or beach home, is occupied by the owners at various times throughout the year or perhaps for a few months at a time. A rental property is never occupied by the owners but instead purchased for monthly cash flow and property appreciation. At each higher level of risk, rates will be a bit higher and require more down payment.

A primary residence has the best rates and terms. That makes sense because should someone ever get into some sort of financial trouble where the owners are having trouble keeping up with the mortgage payments, a second home or rental property will have less priority compared to the home the owners live in full time. Should an owner decide which property to sell or let go into foreclosure, the primary residence will be held while non-owner occupied properties would be forfeited.

A rental property will have the highest rates of the three property types. With a traditional 30 year fixed rate conforming loan, the rate for a rental property can be as much as 0.50 percent higher and can carry slightly higher fees. Yet in between the primary and rental property is a vacation home. How does a lender know whether or not a property is being financed as a vacation home and not a rental property?

First, the transaction has to make sense. A lender isn’t going to be convinced that a home located across town is a vacation home. Instead, the property must indeed be located in an area where vacations are typically taken such as near the beach or a mountain retreat. The difference here is in the rate and fees. Rental properties will have slightly higher rates than a vacation home and will command more down payment. A rental property might need a down payment of 20 to 25 percent or more whereas a vacation home can ask for a down payment of only 10 percent in most cases.

A vacation home can also generate rental income while not being occupied by the owners. And that’s an attractive feature. The income generated from a vacation home will offset part or even all of the cost of the mortgage, taxes, insurance and maintenance. However, unless you’re an experienced landlord and own multiple rentals, income from a vacation home can’t be used to help qualify for a new mortgage.

Where can you get this data? Vacation homes are marketed and managed by real estate agents. These agents have all the information regarding how often a home was rented out over the past year and how much revenue was generated.

If you’ve ever rented a mountain cabin or beach house for a vacation and looked at how much you had to pay for that rental, don’t be surprised if you start wondering whether or not you’d like to own your very own vacation property. For many vacation property owners, that’s how it starts.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending.

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country.

Reed was the former Technology Chair for the Texas Mortgage Bankers Association, Board Member and President of the Austin Mortgage Bankers Association. He is married and a father of three in Austin.

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