Expect to put at least 10% on a vacation home (compared to a 5% minimum, or even no down payment, for a primary residence). You can buy your primary residence with only 3% discount in many cases. But you need at least a 10% discount to buy a vacation home and that's if the rest of your application is very strong (high credit score, low debt, etc.). Do you ever return home after a great vacation and wish you could have that piece of paradise to yourself? Buying a vacation home in your favorite destination is not only a great investment, but it can also allow you to create memories for years to come.
Discuss average sales prices in the area with your real estate agent to assess how much you need to put into a home. You should also evaluate how much remodeling or initial maintenance work a property may require to determine if it is worth the investment. Since FHA loans aren't an option for anything except for principal residences in the United States, you'll need conventional financing or a portfolio loan from a private lender. Either way, lenders generally require a 20% to 25% down payment on a second home to make it less risky for them.
If you use the property as an investment property, you may be required to pay an even larger down payment. Before making a decision, you should also talk to your mortgage lender about using your vacation home as a short-term rental property. If you're having trouble qualifying for a vacation home loan when you first apply, try looking for a lender with more lenient requirements. Lenders assume that if landlords have financial problems, they will be more aggressive in keeping up with primary residence payments than vacation home payments.
Some homeowners defray their monthly mortgage payments by renting their vacation home when they don't use it. To get a loan to buy a vacation home, be prepared to pay more upfront and show that you have a higher credit score and a better debt-to-income ratio than you would need when applying for a mortgage for a primary residence. If you rent your vacation home and use the income to pay your mortgage, your vacation home could pay for itself. If you are buying a multi-unit vacation home, lenders will almost always treat your purchase as an investment property, whether you plan to rent it or not.
You could make several hundred dollars a night, enough to put a dent in your monthly vacation home mortgage payment. Conventional loans are often available for vacation homes, but mortgages for such properties are often accompanied by higher down payment requirements (at least 20%), higher interest rates, and more conservative lending guidelines. With a vacation home, you can receive tax benefits for mortgage interest and property taxes if the home is used as a secondary residence. Determine if you have the financial resources to renovate your future vacation home to fit your specific needs and preferences.
Consider these pros and cons with your family to help you decide if buying a vacation home is right for you. Vacation home sales skyrocketed at the start of the pandemic, and now that many Americans can work remotely, their appeal may be even stronger for some. For example, if your vacation home will be in a popular area for retirees, you may need to make your property more accessible. Decide if you prefer the flexibility of choosing from a variety of destinations for an annual vacation rather than the reliability of having a vacation home you can always go to.