What You Need to Know about Buying a Vacation Home

Although there are a number of enticing reasons to buy a vacation home, purchasing a second home may be more difficult than it once was. The reason for this is that, even though some lenders are currently loosening the lending standards they have previously tightened in response to the pandemic and its economic fallout, requirements still remain stricter than they were before the pandemic. As a result, even with a high salary, strong job security, and an excellent credit score, homebuyers may find fewer financing options for vacation homes.

What Exactly Is a Vacation Home?

Although many people wrongly assume that vacation homes are identical to investment properties in most respects, including in terms of their financing, the financing options available for vacation homes have different requirements from those for investment properties and primary homes.

To understand the differences between these three types of properties, it’s important to know that a residence is considered a vacation home if:  

  • it’s located at least 50 miles away from the primary residence;
  • it’s a one-unit dwelling; a duplex, triplex, or fourplex won’t meet this criterion; 
  • the borrower has exclusive control over the home and uses it for some portion of the year;
  • it’s suitable for year-round use;
  • it’s not under a timeshare arrangement;
  • it’s not rented full time.

Ways to Finance the Purchase of a Vacation Home

When buying a vacation home, you need to get approved for a second mortgage if you already carry a first mortgage. To qualify for a second home mortgage, most lenders will want to see at least 6 months of cash reserves if you’re self-employed or 2 months if you’re a W-2 employee before approving your application. Irrespective of the financing option you intend to choose, reserves are necessary in order to prove that you have enough cash in order to make your mortgage payments if you experience an interruption of income. 

Additionally, many lenders require a higher credit score and a larger down payment for vacation homes than for primary residences. If mortgage products for primary residences allow for down payments as low as 3.5%, the financing options for vacation homes usually require down payments between 10% and 30% of the home’s purchase price, depending on the type of loan and your credit situation. Another important consideration is that most mortgage products for vacation homes have higher interest rates compared to the mortgages for primary homes.

Now that you know some of the requirements you might need to comply with in order to finance the purchase of a vacation home with the help of a loan, here are a few financing options you may qualify for.

  • Second mortgages – There are 2 types of second mortgages: home equity loans and home equity lines of credit (HELOCs). Home equity loans consist of lump sums of money and offer a fixed rate of interest, which means they’re repaid in equal monthly payments, just like the fixed-rate mortgages on primary residences. Conversely, HELOCs provide access to revolving lines of credit that allow borrowers to withdraw funds as needed, up to a preset credit limit. Although HELOCs are a great financing option when purchasing a vacation home, these products typically have variable interest rates, which may subject you to greater volatility on your monthly payments. The most important benefit of home equity loans and HELOCs is that they give homebuyers access to large amounts of cash at lower interest rates compared to other types of loans.
  • A cash-out refinance – As its name suggests, a cash-out refinance allows you to replace your current mortgage with a new one for a larger amount and keep the difference between the two loans in cash. Similar to any other refinance loan, this financing option is ideal only if you can obtain a lower interest rate than the rate on your current mortgage. 

A few other financing options you may qualify for include:

  • reverse mortgages, which are available for people aged 62 and older;
  • a new mortgage, if you’ve already paid off your first mortgage;
  • mortgage assumption, which allows you to take over the mortgage payments the seller has on the home you want to buy. Because vacation homes aren’t normally eligible for loans backed by the FHA or VA, a loan assumption is a great option particularly if the seller has a VA or FHA loan at a lower interest rate than the rate of the loan you can qualify for. 

If you’re looking to buy a vacation home, our advice would be to take advantage of the lower interest rates available nowadays and turn your dream into reality. To get started on your mortgage application, feel free to contact our friendly underwriters today! 

Checklist to Buying a Home

Leave a reply

Your email address will not be published. Required fields are marked *