Buying a second home, whether you’re buying a vacation home, or making an investment in your family’s future, can be difficult if you don’t know the right place to look for financing. Many people are reluctant to invest knowing they may face some difficulty when it comes to securing the financing they need for such large investments.
You may have been dreaming of a vacation home on the beach, in the mountains, or even a second home in a stunning lakeside community for years but thought it was far out of your reach. If you’ve been putting off making that investment in a second home over fears of financing headaches and hassles, this is for you. Stop allowing the belief that you can’t have the second home you desire rob you of the opportunity to do what you want. Consider these financing options instead.
Why Is it More Difficult to Get Home Loans for Second or Vacation Homes?
The first part of the equation is to ask, “Why?” Why is it more difficult to get these types of home loans? The truth is bank lending is all a matter of balancing the risks vs. the rewards. The truth is that people will work much harder to hang on to their primary homes and mortgages than they will for secondary mortgages.
People are much more willing to cut their losses on a vacation home or second home than on the home where they are living and raising their children. Banks, much like insurance companies, have intricate formulas they follow to determine how great your risk of defaulting on these second loans will be and how long it will take for that to happen if it does. It is only if they believe they will have made enough money in the transaction to balance the risk before the worst happens that they will consider extending the loan.
That being said, the old rules no longer apply when it comes to financing second homes and vacation homes. Even though there is a greater risk to lenders, there is still wider availability to financing due to the many diverse lenders available in today’s competitive mortgage market. Even for second homes and vacation homes. This opens the door to that coveted second home to people who may not have had the opportunity before through financing methods that do not have the same strict lending requirements of days past.
Benefits of Owning a Vacation Home
Many people overlook the many benefits of owning a vacation home. They often view it as something frivolous or a potential waste of money. However, there are many benefits of having a second home, even a vacation home, you may not realize, including the following:
- Always-available space to get away from your hectic life.
- Cost-effective resource for easy access to vacation accommodations over time.
- Backup lodging when your family residence needs repairs, has been damaged by fire, or natural disasters (wildfires, tornadoes, flooding, etc.).
- Opportunity to relax and unwind on your schedule without concerns of blackout dates or no rooms at the inn.
These benefits may seem small in the here and now but as life’s hectic pace begins to creep in and take tolls on your physical and mental health, owning a vacation home can prove invaluable. Plus, if money does get tight along the way, you have options to put it to work making money for you and your family by renting, hosting events, or even selling your vacation home.
Defining a Second Home
Second homes are, for the average person, vacation homes. Even if they are relatively nearby, they are places the family can go to escape the grind of the everyday away from the place you call home for the bulk of the year, month, or even week. They can include any of the following or be something else altogether:
- Lake house.
- Weekend cabin.
- Hunting cabin.
- Fishing cabin.
- Lakeside or riverfront cabin.
- Beach house.
- Cottage in the country.
- Mountaintop retreat.
- Wilderness cabin.
- Ski chalet.
- Beach apartment.
There’s no right or wrong when it comes to your vacation home dreams. Some even dream of tiny homes overlooking the 9th holes of their favorite golf courses. Your dream vacation home is your dream and yours alone. It is, however, helpful if your family is onboard with the dream and gains something of the experience. In other words, seek family-friendly vacation homes or forever fight with the family over your weekend or summertime destinations.
Second homes are investments in future family fun. However, vacation homes and investment homes are generally very different things.
At one time, second homes (vacation homes) and investment properties were treated identically by lenders. What this means is that they were plagued by the following:
- Higher interest rates.
- More paperwork and qualification hurdles.
- Larger down payments.
- Stricter debt to income ratio requirements.
That is no longer the case. Families seeking a second home for a vacation property will find more favorable interest rates, down payment options, and debt to income requirements than for modern investment properties.
With that in mind, you cannot misrepresent an investment property to lenders as a vacation home. It is illegal to do so and the penalties for misrepresenting your intentions are substantial and may even cost you your home. It is simply not worth it.
Down Payments for Second Homes
At one point in time, the standard for vacation home down payments was 20 percent. Fortunately, with skyrocketing real estate costs and other investment considerations, borrowers can purchase lovely second homes or vacation properties with considerably less. For the right borrowers, down payment expectations may be as low as 10 percent. That’s huge news for families that want to be able to enjoy their vacation properties while they have children at home young enough to maximize the investment.
Plus, with additional rules of financing second homes, borrowers can ask the seller to assist with up to six percent of the sales price toward closing costs if the financed amount is between 75.01 and 90 percent of the purchase price. Additionally, if the loan amount is 75 percent or less, then the borrower may receive up to nine percent toward closing costs from the seller. It can make a huge difference in the total out of pocket costs for the borrower.
You also have several options for funding your down payment on a second home, including:
- Selling other homes or assets.
- Personal bank account or savings account.
- Withdrawals from retirement accounts.
- Loans against your retirement account.
- Home equity lines of credit or loans.
Work closely with your loan officer to determine which option offers you the great benefit. Some offer benefits you might not be aware of at first glance but that loan officers are trained to identify.
Loan Options for Second Home Loans
Today, there are more options available than ever before when it comes to funding second home loans. While government loan programs like VA, FHA, and USDA loan programs are only available to primary residences for borrowers, many conventional loan options will make it possible to get the loan you’re dreaming of for your vacation home. They include the following types of loans:
- Fannie Mae loans.
- Freddie Mac loans
- Jump loans.
- Conventional loans.
The bottom line is that you have many borrowing options available to you today when it comes to buying a second home. You have more options than ever before and lenders who are increasingly willing to lend on these types of homes.
The real questions isn’t whether you can get financed for your new second home loan. The question should be whether now is the time for you to make that kind of investment or not. These are a few questions you might want to ask yourself before diving into the second home mortgage marketplace.
- Can you reasonably afford a second home? It’s not something everyone can do – especially in light of the daily demands on your finances. Is now the right time for you?
- Will it be wiser to invest in a vacation home or should you go ahead and invest in a rental property? One bit of good news is that you can change your mind after the sale and adjust accordingly. However, failing to make the transition can be costly and should be avoided.
- Will you have time to fully enjoy your second home? Vacations are important for the sake of your mental and physical wellbeing. A vacation home is only valuable to you if you take the time, with your family, to utilize your second home. Otherwise, it becomes a questionable, perhaps unnecessary, expense.
- Do the numbers work for you? It’s not only about the ability to pay for a second home in the here and now. It’s about the long-term viability of doing so. Are you planning to downsize jobs, transfer to other parts of the country, or even have a partner stay home with the children in the future? Will it be a viable expense in light of these potential changes?
- How will owning a second home affect your tax situation? The tax implications of owning a second home can be big. There are some advantages to consider, including the fact that you can deduct the mortgage interest – but only up to the combined property value of $750,000. However, depreciation is also taxable and worth considering as well. Working with a CPA or financial advisor can help you make informed decisions based on the tax implications.
Vacation homes have a lot to offer the average family. From mood moderation to building important memories that will last a lifetime for all involved, vacation homes can prove to be among the most invaluable investments you’ll make.
Getting the financing right is the other half of the story. Fortunately, there are many financing options for vacation homes for today and your future, provided you have the following to back it up:
- Good credit score.
- Down payment cash to get started.
- Savings to show financial stability.
- Low debt-to-income ratio.
As long as you do not intend to rent your vacation home to others, these loans are widely available. If you do intend to put your vacation home to work for you when you’re not using it, then it becomes an investment property and the borrowing rules change a wide degree. Keep it simple and make your vacation home a strictly non-business entity to get access to the best rates and benefits possible.
Our goal is always to help you get the financing you need to make your financial dreams realities. Contact us today to learn more about your loan options for vacation homes, second homes, and more. Chances are good that we have the ideal loan to help you meet your needs.