You’ve decided to take the plunge and invest in a vacation home. However, a mortgage for a vacation home is vastly different from your traditional loan.
Before you purchase your home away from home, it is important to note the following key factors.
Higher costs
Depending on the location of your vacation retreat, you will more than likely have to pay a higher interest rate and higher property taxes. Financing a vacation home is seen as a larger risk to lenders, so they will usually require a larger down payment as well.
Even if the homeowner plans on renting out their secondary residence when it’s not in use, they are still juggling two mortgages. This is not a good look when lenders are inspecting the potential buyer’s finances.
Even more so, many popular vacation spots are located in areas that are prone to hurricanes and flooding. Because of this, the homeowner will have to pay a higher insurance premium.
Limited options
Since a vacation home is not considered a primary residence, you can not use FHA or VA loans to finance your purchase.
Depending on the lender, you could also expect to make a down payment between 10 to 15 percent. A primary residence usually requires a 3% down payment.
Disclosures
There are many ways a vacation residence can be classified, but more than likely it will be either of the following:
- Primary residence: The homeowner lives here most of the year.
- Secondary residence: The home can not be rented out more than 180 days out of the year.
- Investment property: The home is strictly a rental home for income purposes.
The occupancy type can change over the years, but this likely means the home will need to be refinanced in order to change the mortgage terms.
Pre-approval
It is best to get pre-approved for a mortgage before you start looking at your vacation property. While this is recommended for any home purchase, it is especially necessary for a secondary residence.
Credit score requirements are typically higher on a second home purchase. Also, some loan programs may not allow you to rent out your vacation home, so keep that in mind.
While there may be some hurdles to jump when qualifying for a second home mortgage, the reward can be so worth the effort. Weigh the pros and cons, and make sure to speak with at least three lenders before making your decision.
