Buying a second home is a big step, but one with personal and financial rewards. Perhaps the most obvious is — it’s a place to holiday. Owning a vacation home beats staying in a tiny hotel room, spares the hassle of having to make reservations, or worrying about the cost of rental rates and restaurant prices each time you want to take a trip.
And over the long term, a vacation home can provide many other financial benefits. You build wealth as the home appreciates in value, and if you choose to rent the home when not using it, it can also provide a lucrative passive income stream.
Whether you’re considering buying a vacation home now or at some point in the future, there are steps you can take to make the process more seamless.
How to buy a vacation home
As with any home purchase, buying in a new area requires additional research and preparation.
Step 1: Decide how you’ll use the vacation home
If you don’t currently own a home, you can purchase the vacation home as your primary residence. Do so would allow you to qualify for a home loan with as little as 3 percent down (assuming the purchase price isn’t greater than the conforming loan limit in the desired area), and take advantage of homeowner tax benefits.
If you purchase property as a second home, you’ll likely need to put down at least 10 to 15 percent to secure a loan. Still, you’ll get the same tax breaks as you would if the home was your primary residence.
The vacation home can also be used as an investment property if you plan to rent it out when it’s not occupied thereby helping you cover the monthly mortgage payment. That said, if you’ll primarily use the home as an investment property (general rule of thumb: you’ll live there for less than 14 days annually), you’ll pay a higher interest rate on the loan, and the down payment will be much higher.
Step 2: Determine what you can afford
Before you can purchase a second home, it’s important to understand the costs you might face.
If there’s a mortgage, then there are expenses for principal, interest, taxes and insurance (PITI). In addition to your monthly mortgage, there are other expenses associated with vacation property ownership, these expenses generally include:
- Maintenance and repairs
- Management and vacancies (if you rent)
- Furniture and housewares
To offset costs, vacation property owners may want to consider short-term overnight rentals through platforms such as Airbnb, FlipKey or HomeToGo, as well as in-season rentals through a local real estate broker.
According to the IRS: “If you rent a dwelling unit to others that you also use as a residence, limitations may apply to the rental expenses you can deduct. You’re considered to use a dwelling unit as a residence if you use it for personal purposes during the tax year for more than the greater of: 1. 14 days, or 2. 10% of the total days you rent it to others at a fair rental price.”
However, by its very nature a second home tends to result in other costs. For example, if you’re 200 miles from the property, you will need to hire someone to look after the property.
If you’re thinking of buying property by the beach or in a forested area, look into the availability and cost of insurance before you buy. You can’t get or keep a mortgage without required insurance coverage, so make sure it’s both available and at an affordable price.
Step 3: Seek out a local lender
It’s best to look for a mortgage lender who specializes in second homes in the area where the property is located. The lender will have ready sources of financing and understand the required rules and specifics of the area you’re buying in.
How you finance, for example, depends on where your vacation property is located. For lenders, a second home carries more risk than a primary residence — in the case of a downturn, borrowers are more likely to prioritize payments on their primary residence. Also, you won’t be a full time occupant of the property which exposes the property to additional risks, for example if a water pipe were to burst it could be days or weeks before this were caught. Also, many vacation destinations are located in coastal areas and such which expose them to great storm or other risks. To offset that risk, buying a second home typically requires more money upfront and the financial capacity to afford two homes; if you borrow, loans come with higher interest rates.
Matters become even more complicated if the property is to be rented. It is easier to qualify for a loan for a second home than it is for financing for an investment property.
An experienced lender with localized knowledge will be your best resource when looking to buy a vacation home.
Step 4: Decide how to finance your vacation home
Once you find a lender, consider your financing options. You may be considering paying the down payment through savings, a cash-out refinance from your primary residence, or a home equity line of credit (HELOC). Your own funds are usually the best option as this means you won’t tack on additional debt.
When it comes to financing a vacation home, FHA and VA loans are not an option — they’re only offered for primary residences — but conventional financing is available.
Freddie Mac, once of the biggest purchasers of conventional loans, defines a second home as:
- It must be occupied by the borrower for some portion of the year.
- It must be a one-unit dwelling.
- The borrower must have exclusive control over the property.
- It cannot be a timeshare.
- It must be suitable for year-round occupancy.
- The property cannot be subject to any agreements that give a management firm control over the occupancy of the property.
- Rental income cannot be used to qualify the borrower.
Step 5. Check the vacation home loan requirements
Even if your vacation home is going to serve primarily as a second home — vs an investment property — financing it is likely to be a bit little more rigorous than financing a primary home.
- Debt-to-income ratio – For a primary residence, borrowers can some lenders will finance a buyer with a debt-to-income ratio as high as 50 percent, or DTI. For a vacation property, DTI can be up to 45 percent.
- Credit score – You usually will need a higher credit score to qualify for a second home than for a primary residence. This is partially due to the fact the purchase will require a conventional loan, as opposed to a FHA loan, with their low-low 500 threshold. A credit score of at least 640 is more typical of conventional loans; for a vacation property, 680 is likely to be the absolute minimum.
- Down payment – Generally, you can purchase a primary residence with as little as 3 percent down. With a vacation home, you’ll need at least 10 percent.
- Reserves – In some cases, you can buy a primary residence with little or no reserves. For a vacation home, you’ll likely need reserves equal to two to six monthly mortgage payments.
Be sure to check vacation home mortgage requirements with different lenders, as they may vary.
Step 6: Compare vacation home mortgage rates
Vacation home mortgage rates are typically higher than financing for a primary residence — expect to pay a premium of 50 to 100 basis points higher than the going rate. As such, it is important to shop around to find the best second home mortgage rates and terms.
Step 7: Work with a local Realtor
Buying real estate in a new area — or even one you’ve vacationed in for many years requires expert guidance and you’ll want to be sure to work with an experienced local real estate professional. An experienced local agent will not only be familiar with the local area including local regulations and restrictions, as well as what properties are available including on market listings, but also pocket and private listings that aren’t being actively listed for sale.
Bottom line on buying a vacation home
If considering buying a vacation home, think about how you will use it, how often, and whether or not you will rent it out and if so if you will self-manage it or hire a property manager specializing in short term rentals.
One of the best ways to get started is to find and rent a short-term rental in the area. See if you really like the location. Consider distances and traffic conditions, stores and restaurants, and the availability of parking, medical care and (if applicable) schools or day-care centers. What are the pluses and minuses? Speak with local real estate brokers and visit open houses.
Bear in mind that obtaining financing for the purchase might involve you having a more sterling record and meeting more stringent requirements than your first mortgage did. After all, you already have a large obligation — your current home — and lenders will consider that. Hopefully you have a strong credit score and at least 10 percent to put down as this will work in your favor.
The more you know, the better your chance to get the vacation home of your dreams.
If you, or someone you know is considering Buying or Selling an Investment Property in Columbus, Ohio please give us a call and we’d be happy to assist you! If you’re looking to buy outside of Central Ohio and are interested in receiving a referral for a top local agent in the area you’re looking we can help with that too!
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Downtown Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Galena 43021 Hilliard 43026 Lewis Center 43035 New Albany 43054 Pickerington 43147 Polaris Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235
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