If you have a lower credit score or a higher debt-to-income ratio, your mortgage lender may require at least a 20% down payment for a second home. A down payment of 25% or more can make it easier to qualify for a conventional loan. If you don't have a lot of cash on hand, you may be able to borrow your down payment. However, renting leads to increased costs.
If you plan to use the home primarily for the income it will provide, you will likely need an investment property loan, not a residential mortgage, that type of loan is usually more expensive. Still, a second home can be a valuable asset, and if natural real estate appreciation works in your favor, owning a vacation property can certainly help you build up your personal wealth. Lenders base prices on risk and generally feel that borrowers are more likely to fail to repay a vacation home loan than a mortgage on their primary residence. Now let's go over what the process of buying a vacation home looks like and what you should expect.
The minimum down payment for a vacation home is usually 20%, but some lenders have increased their minimum down payment requirement to 30% or even 35% for a second home. In addition, while a vacation home can be a valuable asset, like any investment, there is no guarantee that it will appreciate in value. You may be wondering if you are allowed to make occasional short-term rentals on a vacation property classified as a second home. Once you have determined that you are eligible and that you can apply for a second home loan, you can get pre-approved for a mortgage and start looking for a real estate agent with experience in the area where you plan to buy.
Regular maintenance and repair costs often surprise new homeowners, and your vacation home is no exception. Your vacation home should be in an area where you have already spent time, and one that you know you will be happy to visit again and again. If you are looking for a true home away from home, where you set the rules and everything is always the way you like it, then buying a vacation property is probably the best option. If you can save enough, a cash purchase is the easiest method to pay for a vacation home.
First of all, you should consider whether buying a vacation home is a realistic or responsible financial goal in your current position. For those planning to rent out their vacation home for additional income, not all lenders will allow rental income to be factored into the loan qualification.