Vacation Property Walkthrough: Financing A Vacation Property
A vacation property comes with all of the expenses of a primary residence, including mortgage principal and interest, property taxes, homeowners insurance, association dues, utilities, and costs associated with maintenance and major repairs. In addition, the vacation home may need new appliances and flooring, painting and sealing, furnishings, lighting fixtures, window treatments and supplemental insurance (such as hurricane or flood insurance). It is important to consider all of these expenses - for both the primary residence and vacation property - when determining if a second property is financially feasible. Much of the joy of owning a vacation home is lost if it becomes a financial burden.
Once it has been established that purchasing a vacation property is financially manageable, one must consider the financing options. For many home buyers, an FHA-insured loan is ideal because these loans require a low down payment of just 3.5%. These loans, however, are not available for second home purchases, so buyers must look into other options.
For buyers who have saved enough money, an all-cash purchase is the easiest method to purchase a vacation property. Since many vacation home buyers tend to be older and in more comfortable financial situations, all-cash purchases are fairly common - according to the NAR 2011 Investment and Vacation Home Buyers Survey, 36% of vacation home buyers paid cash, as did 59% of investment buyers.
Home Equity Loan
A home equity loan is another option for buyers who already have substantial equity in a primary residence. The drop in real estate prices in recent years may affect the amount of equity one has in a home, resulting in a potentially smaller home equity loan. In addition, lenders may be less willing to approve a home equity loan if it takes too much equity from the borrower's principal residence.
Conventional loans typically entail significant down payments. For single-family homes, the down payment may be around 25-30%, depending on the market and the buyer. For condominium units - a particularly hard hit segment of the mortgage industry following the late 2000s financial crisis - it may be closer to 50%, and both the buyer and the condominium association will have to qualify for the loan.
To qualify for a conventional loan on a vacation property, the borrower will need a high credit score, a strong debt-to-income ratio, and they must be able to provide the lender with documentation regarding income and assets. Not all lenders will allow rental income (if the vacation property will be rented out) to be considered for the loan qualification. Lenders that do consider rental income may only allow a percentage to count toward loan qualification, and they may require documentation regarding the property's rental history.
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