How to Finance Vacation Homes?

Published on: March 10th, 2022 | Written by Jimmy Vercellino

vacation home mortgage requirements

Work-life balance may prevent you from taking vacations with your family, especially if you’re a high-performer at your career. It is burdensome to watch your kids grow up and not enjoy quality time with them like you know you should. This can be a telling sign to purchase your first vacation property.

When you own your own vacation home, enjoying the beach, hiking, and other relaxing activities is simply. You throw out the hassle of finding available reservations by driving to a comfortable home you already own.

To qualify for a decent vacation property mortgage rate, there are several requirements to meet. Your never-ending vacation is waiting for you. Here’s what you need to know about vacation home mortgage requirements to take the plunge.

How Will You Use the Home?

The way you intend to use a home determines the purchasing process and specific loan requirements. There are 3 categories your home may fall under: primary, secondary, or investment property.

Knowing what kind of home your vacation property will direct you moving forward with an experienced lender. They can set you up with the best mortgage and lowest rates so you and your kids can spend quality time together.

Primary Residence

We classify a primary home as the home you live in for the majority of the year. Typically, mortgage interest rates will be the lowest of your 3 residence categories.

The requirements for qualifying for a primary residence home loan are also lower than other types of residences. For instance, you can purchase a primary home with a down payment as low as 3%, and your debt to income ratio may be higher.

Lenders give these perks because they believe they take on less risk when lending for a primary home. In financial setback cases, borrowers are more motivated to pay for the roof under which they live than other types of residences.

Secondary Residence

A secondary residence is a home you live in for less than a majority of the year. You may have friends and colleagues that work on different coasts or who are snow bunnies that live up north but spend their summers in warmer climates. Most vacation homes fall under the secondary residence category.

When financing a second home, qualifications differ from a primary residence. The primary marker is you cannot use FHA or VA Home Loans to fund these properties. In addition, credit score and debt to income ratio requirements are often stricter.

This ensures the bank is taking on a safe amount of risk to avoid defaulting on the mortgage loan. You’ll need a higher down payment for vacation homes purchased that are secondary residences.

Investment Property

If you purchase a home with the intention of renting it out for rental income, we would consider it an investment property. These could either be long-term rentals or vacation rentals, such as Airbnb’s or VRBO’s.

Investment properties differ from primary and secondary homes with property taxes and deductions. You should also know that finance requirements can vary with vacation homes in this category.

For instance, investment homes require higher down payments but lower credit scores. The bank may require you to have cash on hand to cover six months of mortgage payments before they will lend to you too.

Avoid Vacation Home Fraud

We believe you need to know that classifying a rental home as a secondary home is fraud and can cause severe legal consequences. This relates to your dream vacation home if you decide to call it an investment property when really it’s a summer getaway.

That’s why our team stresses the importance of understanding the 3 kinds of residences.

However, you may be able to classify your vacation property as a secondary home if you live in it more than 14 days per year or 10% of the days it’s rented. An experienced real estate agent will be able to clarify questions for you in this realm.

How Will You Finance the Vacation Home?

Now that you know whether your vacation home classifies as a secondary home or a rental property, you must decide how you will finance the purchase.

Banks are more liberal with their lending practices for primary homes, but that does not mean you are ineligible for low mortgages.

Many opt to gain a down payment for a vacation home with a cash-out refinance of their primary mortgage or securing a home equity line of credit. Doing so is beneficial because a higher down payment avoids higher interest rates and guarantees lower monthly payments.

Do You Meet the Loan Requirements?

Vacation home loans vary from lender to lender, whether they are an experienced private lender or a bank. We recommend calling several parties to see who provides personalized service and funds exactly what you need for a vacation property.

The following are the typical standards for vacation home loans.

  • Debt to income ratio up to 43-45 percent.
  • Credit score above 640
  • Minimum 10% down payment
  • Reserve of 2-6 months mortgage payments

Are You Ready to Purchase Your Dream Vacation Home?

If you meet these qualifications, you are ready to start vacationing the right way! Don’t waste any more of your time and energy looking for way overpriced rentals. Instead, pack up your suitcase and head out to your own vacation property.

We specialize in finding the right mortgage option for you. Don’t worry about learning the ins and outs of vacation mortgages on your own. We have done that work for you and can explain all of your mortgage options step-by-step.

Call us today at (480).800.8387 to ask all of your questions. Start your exciting journey towards purchasing your dream vacation home now!

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