How to Finance a Vacation Home

Wide shot of couple relaxing on deck of luxury tropical villa overlooking ocean

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A borrower looking to finance a vacation home has several options. Among them are a conventional mortgage, home equity loan, home equity line of credit (HELOC), or cash-out refinancing loan.

Before choosing a way to finance a vacation home, consider the lender’s requirements for credit scores and down payments as well as other factors that’ll determine whether you qualify for financing and how much your interest rate will be.

How to Finance a Vacation Home

To buy a vacation home, you’ll need to assemble key documents, meet financial requirements, and choose a financing option.

Key Documents

Among the documents you’ll likely need to supply when you’re taking out a mortgage for a vacation home are:

  • Proof of income and employment: For a borrower with a traditional job, a lender typically requires recent pay stubs and two years’ worth of W-2 forms as proof of income and employment. For a self-employed borrower, a lender might want to see two years’ worth of personal tax returns, two years’ worth of business tax returns, a year-to-date profit-and-loss statement, and a business balance sheet. In addition, a self-employed person may need to provide letters from current clients, a signed statement from their CPA, a business license, and proof of business insurance.
  • Financial statements: Generally, a lender will request that a loan applicant provide statements from their bank and investment accounts.
  • List of monthly debts: This may include credit card bills, home insurance premiums, and loan payments (such as those for car loans, student loans, and personal loans).
  • Recent mortgage statements: If you own a primary residence, the lender for a vacation home purchase likely will want to see recent mortgage statements for that residence.

Financial Requirements

Financial requirements that a mortgage borrower normally must meet when buying a vacation home include:

  • Adequate credit score: For most mortgages, a lender requires a FICO score of at least 620 when a borrower is buying a vacation home.
  • Acceptable debt-to-income ratio: The debt-to-income ratio (DTI) measures how much someone’s monthly debt obligations are vs. how much their gross income is each month. In general, a borrower needs a DTI of 45% or below to qualify for a mortgage on a vacation home.
  • Sufficient assets: A lender typically adds up a borrower’s assets, such as savings, checking, and investment accounts, to gauge whether they’d have enough money available to cover the loan in case of financial troubles (such as losing a job).

A borrower taking out a conventional mortgage to finance a vacation home might need a credit score of at least 620 and a down payment of at least 10%.

Financing Options for a Vacation Home

A conventional mortgage may be the first financing option that comes to mind when you’re buying a vacation home, but it’s certainly not the only option.

  • Conventional mortgage: A conventional mortgage, also known as a traditional mortgage, is a loan that’s not backed by a government agency such as the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA) or U.S. Department of Agriculture (USDA). To qualify for a conventional mortgage on a second home, a lender may require a credit score of 620 or more.
  • Home equity loan or home equity lines of credit (HELOC): A homeowner may be able to tap into the equity of their primary residence to come up with money for the purchase of a second home. Home equity is the difference between what a home is worth and how much of the mortgage remains unpaid.
  • Cash-out refinancing: A cash-out refinancing loan is another way to take advantage of home equity to buy a vacation home. The new, bigger mortgage obtained through a cash-out refinancing replaces the current, smaller mortgage, and the homeowner then can convert some of their equity into cash.

Conventional mortgages—those not insured by a government agency—typically can be used to finance a vacation home. But government-backed mortgages like FH, VA, and USDA loans normally aren’t available for the purchase of a vacation home.

How to Choose a Lender for a Vacation Home

Choosing a lender for a vacation home is much like choosing a lender for a primary residence. Here are six questions to consider when finding a lender for a vacation home.

  1. What type of lender is it? When shopping for a lender, a borrower should settle on whether they’re comfortable borrowing money from an online-only lender, a mega-bank, a regional or community bank, or a credit union.
  2. What are the lender’s requirements? For instance, what are the minimum credit score and minimum down payment, along with the maximum debt-to-income ratio, needed to take out a loan for a second home? Some of these requirements may differ from those for a regular mortgage.
  3. How much will the fees be? For example, what are the amounts for the application fee, appraisal fee, loan origination fee, and loan servicing fee?
  4. What is the interest rate? Before agreeing to take out a loan, dig into what the interest rate will be as well as the annual percentage rate (APR). The interest rate is the percentage of money paid to borrow money. The APR comprises the interest rate along with fees.
  5. What is the lender’s reputation? Is the lender known for great customer service? What do online reviewers say about the lender? Checking into the lender’s background can help determine whether to do business with it.
  6. How much experience does the lender have with second homes? Taking out a loan from a lender that’s familiar with second homes may simplify the borrowing process.

Compare the Best Mortgage Lenders for Vacation Homes

Lender Min. Credit Score Max. DTI Ratio Days to Closing
Rocket Mortgage 620 50% 26
Fairway Mortgage 620 47% 30–45
Caliber Mortgage 620 49.90% 30
Bank of America 620 55% Not disclosed
Prosperity Home Mortgage 600 50% 30
Cherry Creek Mortgage 620 50% 30
Primary Residential Mortgage 660 50% 21–30

Can You Rent Out Your Vacation Home to Help Cover the Costs?

Yes, you can rent out a vacation home to help cover expenses. Keep in mind, though, that this carries tax implications. If you rent out a vacation home for more than 14 days in a year’s time, the IRS will collect taxes on your rental income.

How Much Money Should You Put Down on a Vacation Home?

As a rule, a buyer of a vacation home needs to come up with a down payment representing at least 10% of the purchase price. So, if the purchase price is $400,000, a 10% down payment would be $40,000.

Can You Finance a Vacation Home With Friends?

Yes, you can finance a vacation home with friends or relatives. Before signing the loan paperwork, though, make sure everyone agrees on key things like who’s responsible for expenses, when each co-owner can use the house, and whether the property can ever be rented out.

Article Sources
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  1. Rocket Mortgage. “Ultimate Mortgage Preapproval Checklist.”

  2. FreddieMac. “Qualifying for a Mortgage When You’re Self-Employed.”

  3. Rocket Mortgage. “Mortgage Qualification Tips: How to Qualify for a Mortgage.”

  4. Consumer Financial Protection Bureau. “What Is a Conventional Loan?

  5. Better. “Can I Get a Conventional Loan for Vacation or Investment Properties?

  6. H&R Block. “Vacation Home Rental Tax Rules.”