Buying a vacation home is an exciting prospect, but it's important to understand the debt-to-income (DTI) ratio requirements for a second home. Generally, lenders prefer a maximum DTI of 36%, but some may go as high as 45%. This ratio is calculated by dividing your monthly debt obligations by your gross or pre-tax income. To qualify for a loan, you may need compensating factors such as more months of cash reserves, a higher down payment, or a higher credit score.
When it comes to calculating your DTI, lenders take income (or loss) from your Schedule E and add back up depreciation, mortgage interest, property taxes, and insurance. This number is then subtracted from the total mortgage payment to determine how much debt will be considered in the DTI calculation. When buying a vacation home, you may not have rental income to offset the mortgage payment. Therefore, you'll need to qualify with your income from another source.
The down payment on a vacation home can be as low as 10%, but it can be 20% or more for an investment property. A vacation home can be an excellent option if you don't count on it providing you with income and being able to pay the mortgage. It can also provide tax advantages and the joy of having a second home for the holidays. However, it's important to consider all of the risks associated with buying a vacation home before making a decision.
If you are considering applying for a mortgage for an additional property, it's important to understand the debt-to-income ratio requirements for a second home. Lenders in the United States and Canada will take a close look at your DTI ratio when evaluating your application.