Buying a vacation home: 8 steps for getting a vacation home loan

Buying a second home is a big step but comes with personal and financial rewards. Owning a vacation home beats staying in a tiny hotel room and spares the hassle of making reservations or worrying about the cost of rental rates. And over the long term, a vacation home can help you build wealth as the home appreciates.

Whether you’re considering taking out a loan for a vacation home now or it’s still on your wish list for the future, there are steps that can make financing a vacation home more seamless.

How to buy a vacation home

As with any home purchase, buying in a new area requires serious thought and preparation.

Step 1: Decide how you’ll use the vacation home

If you don’t yet own a home, you can use the vacation home as your primary residence. You could qualify for a home loan with just 3 percent down, assuming the purchase price isn’t greater than the conforming loan limit in your area, and take advantage of homeowner tax benefits.

You can use the property as your second home, but you’ll likely need at least 10 to 15 percent down to secure a loan. Or, you can use the vacation home as an investment property if you plan to rent it out when it’s not occupied.

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However, if you’re primarily using it as an investment property (rough rule of thumb: you’ll live there for less than 14 days annually), you’ll pay more in interest on the loan, and the down payment will be much higher.

Step 2: Determine what you can afford

Before you decide to take out a mortgage on a vacation home, it’s important to understand the costs you might face and determine if a second home is in your budget.

In addition to your monthly mortgage payment, you’ll pay other expenses associated with vacation property ownership. These expenses generally include:

  • Maintenance and repairs
  • Management and vacancies (if you rent)
  • Furniture and housewares

Step 3: Find out about vacation home insurance

If you’re planning to get a loan for a vacation home, your mortgage lender might require that you purchase a vacation home insurance plan. These costs vary depending on the property’s type and location. For example, a beachside home can be riskier due to the potential for hurricanes and flooding, so premiums will likely be higher than homes more inland.

Look into the availability and cost of insurance before you decide to buy a vacation home, and factor it into your budget.

Step 4: Seek out a local lender

It’s best to look for an experienced mortgage lender specializing in second homes in the area where you want to buy, if possible. A local lender (who finances vacation homes) will have sources of financing ready and understand the required rules and specifics of the area you’re buying in.

Step 5: Decide how to finance your vacation home

Once you find a lender, explore your options for financing a vacation home. You may consider paying the down payment through savings, a cash-out refinance from your primary residence or a home equity line of credit (HELOC). If possible, using funds from your savings is often the best option because you won’t tack on additional debt.

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While lenders can be liberal in some ways when financing a primary residence, vacation homes are different. FHA and VA loans are out — they’re only intended for primary residences — but you can get conventional financing. You just may need to meet certain requirements.

For example, according to Freddie Mac, a second home must meet the following criteria:

  • The borrower must occupy it 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 6. Check the vacation home loan requirements

Even if your vacation home is going to be mainly a home — not an investment property — financing is often a little more rigorous than for a primary home.

  • Debt-to-income ratio – Borrowers can sometimes finance with a 50 percent debt-to-income ratio (DTI) for a primary residence. 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 a primary residence. A credit score of at least 640 is more typical of conventional loans; for a vacation property, figure on 680 for a minimum.
  • Down payment – Generally, you can buy 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.
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Step 7: Compare vacation home mortgage rates

Vacation home mortgage rates are typically higher than financing for a primary residence — about 0.5 percent to 1 percent extra. Be sure to search for the best second home mortgage rates and terms.

Step 8: 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, so be sure to work with an experienced local real estate professional. They will know not only what properties are available but also why you might prefer one to another, and any local regulations or restrictions.

Bottom line on buying a vacation home

If you’re considering buying a vacation home, think about how you will use it and whether or not you will buy it as a rental property. One of the best ways to get started is to live in a short-term rental in the area to see if you like the location.

Consider distances and traffic conditions, stores and restaurants and the availability of medical care and (if applicable) schools or day-care centers. Speak with local real estate brokers and visit open houses.

Keep in mind that obtaining financing for the purchase might involve you meeting more stringent requirements than your first mortgage. The more you know, the better your chance to get the vacation home of your dreams.

Frequently asked questions about buying a vacation home

  • Should you invest in a vacation home?

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  • How much money should you have saved to buy a vacation home?

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  • What is the difference between a vacation home and a second home?

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