A vacation home allows you to enjoy leisure time in a beautiful environment and allows you to secure an additional asset for your portfolio as well. A second home allows you to enjoy beautiful accommodations which you fully control. Why enrich hotel and resort owners when you could be building equity with your own cottage or vacation property?
When You Should Get a Mortgage for Your Vacation Property
A vacation home mortgage may come with higher interest rates and stricter requirements. However, there are a few reasons why you may want to buy a vacation property:
- You have paid off your principal home and wish to continue investing in another property
- You do not want to buy investment real estate but want more than one property
- Your family is expanding and you need more room
- You like the idea of vacationing in the same spot each year
- You want to live in the city but like the idea of a larger property, too
- You want more options than your current home offers but do not want to move or sell
- You want a second home for visiting family or to visit family regularly
Qualifications for a Second Property Mortgage
Applying for a second mortgage comes with slightly stricter qualifications than a primary home loan, but there are options. With a vacation home, prepare to have more cash reserves. You will need to have a larger down payment for a second home, typically between 10% and 20%, although the amount you need will vary, depending on your situation.
In some cases, you may be able to use the equity from your current home to pay for the down payment on a vacation property. You will not usually be able to qualify for a government-insured loan with this type of purchase.
With a vacation property mortgage, you will need to have two to six months of cash reserves, equal to the amount it would take to pay both your home loan and vacation property loan for those months.
You will also need good credit and a strong debt-to-income ratio. Requirements for credit scores are slightly higher than they are for primary home mortgages.
When buying a vacation home, you may think you can rent your property part-time with a short-term rental platform and use the proceeds to pay the mortgage. To do this, you need to understand the rules.
Fannie Mae, an agency which creates the regulations for the mortgage industry, does allow property owners to rent their vacation home part of the time and qualify for a vacation home mortgage. However, there are a few caveats.
If you rent your vacation home more than occasionally it may be considered an investment property. If it is an investment property, you will need to qualify for an investment mortgage, which comes with stricter requirements and higher rates. In addition, you cannot use the expected rental income to qualify for your mortgage.
If you want to make some money on your vacation home but do not want an investment mortgage, your home must qualify as a second home. To do this, it must belong entirely to you, be a one-unit home and be available for year-round use. In addition, it must not be controlled by a management firm, must not be a timeshare and must not be rented full time. The vacation home must be a reasonable distance from your own home.
What to Expect for Vacation Home Mortgage Rates
Vacation home mortgage rates are higher than the interest on primary homes but lower than investment property rates. The exact rates you are charged will depend on a number of factors, including the down payment you can offer, your credit score, your financial position and more.
If you want to know how much you can expect to pay, use a vacation home mortgage calculator or contact a local Assurance Financial loan officer. You can also walk through the pre-qualification process with our virtual assistant, Abby.
How to Qualify for a Vacation Home Mortgage
If you want to purchase a cottage or other vacation property, you will first want to get into the best financial position possible. Pay down debts, improve your credit score and save up money both for your cash reserves and down payment.
In addition, consider the right financing for your second property. You may want to refinance a current property, taking the difference in cash and using the cash to buy or put the down payment on a second home. As long as you can afford the higher payments each month on your home loan, you can enjoy good interest rates on a cash-out refinance loan.
You can also get a home equity line of credit (HELOC) on your primary home and use the equity from your home to purchase a second home. Your HELOC will not impact your mortgage and qualification for this type of loan is usually quick. You may even be able to enjoy low interest rates, although you will need to consider you will have to pay two debt payments if you take this route.
You can also just get a conventional home loan on the vacation property. This is a great option if you don’t have much equity in your current home or do not wish to tap your home or other resources to buy. If you can put down a good down payment of at least 10%, you may qualify.
Before you take the plunge and buy, you may wish to examine how a second home could affect your finances and your taxes. If it is a true vacation home, you may be able to realize some tax breaks. However, you will also need to pay property taxes, maintenance, insurance and other expenses. Do the math.
Before you buy, you may also wish to speak to a Assurance Financial loan officer to understand your options and to get answers to your questions. A loan officer can give you a rate quote and can help you understand current mortgage rates vacation home as well as financing solutions.
Apply for a Vacation Property Mortgage Today!
Applying for a vacation home mortgage can be simple when you’re dealing with people people instead of numbers. At Assurance Financial, we pride ourselves on working with borrowers and clients to help them find the right mortgages and rates for their lives. We are transparent, honest and response and we offer free, fast quotes.
We walk you through our simple process, starting with pre-qualification, which can take just 15 minutes. You can get a rate quote and a sense of how much you can afford. Once you find a home you love, fill out a full application. We take care of underwriting in-house and once you have gone through processing, including appraisal and approval, you can meet with a notary to sign the paperwork and close the loan.
Ready to get started? You can speak to a live person when you contact a loan officer in your area. Or, if you prefer, you can get the process started online with the help of our virtual assistant, Abby.You don’t even have to fax documents over since Abby can prompt you to sign into payroll and your bank to get financial verification.