Down payment: You can usually buy a primary residence with as little as 3 percent down payment. With a vacation home, you'll need at least 10 percent. The most important requirement is that you need a down payment of at least 10%. A down payment of 20% is generally considered the ideal down payment amount for most types of loans and lenders.
If you can put 20% off your home, you'll get some key benefits. Cash reserves: Once again, a second mortgage means greater risk for the lender and they expect that larger cash reserves will be available to offset that risk. In the case of a secondary residence mortgage, borrowers should expect to have 3 to 5 months of cash reserves on hand to secure their loan. Some lenders may require even more depending on the applicant's credit rating and down payment.
Compared to prime home loans, vacation home loans tend to have slightly higher interest rates, and lenders may require a higher credit score as well as a higher down payment. For example, a primary residence allows down payments of up to 3% for conventional loans. But for a vacation home, you may need between 10 and 20%. With these types of loans, it's also important to remember that renting a vacation getaway while you're not using it could violate your loan terms.
Conventional vacation home loans are an option, but be prepared to make a larger down payment, pay a higher interest rate, and meet stricter guidelines than you would have for a mortgage on your primary residence. Lenders base prices on risk and generally feel that borrowers are more likely to fail to repay a vacation home loan than the mortgage on their primary residence. 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.). It can be difficult to obtain financing for a vacation home in a condominium development that does not meet these requirements or, at a minimum, the lender will charge a higher interest rate to mitigate risk.
If you can qualify for your purchase without the property generating any income, buy it as a vacation home. Since owning a vacation home means you won't be there all the time, you may need to hire someone to look after it during your absences or when you're in between guests, if you rent it. Expect to put at least 10% on a vacation home (compared to a 5% minimum, or even no down payment, for a primary residence). Even though a credit score above 700 is considered excellent, it may not be enough to buy a vacation rental.
Having a vacation property close to your primary residence can be an indicator that the intention of your vacation home is to rent it rather than for personal use, which would qualify the property under a different type of loan. 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. Some homeowners defray their monthly mortgage payments by renting their vacation home when they don't use it. Unlike a first home mortgage, where the buyer can often finance themselves with as little as a 3% down payment, lenders will want to see a minimum of 10% on a secondary or vacation property.
Of course, not all vacation homes are expensive, but even with a relatively affordable second home, you need to make sure your budget can handle additional monthly mortgage principal and interest payments, property taxes, homeowners insurance, and any partnership fees of homeowners. The summer holiday season brings joy to many people, but for some, the yearning for a second home all year round brings a touch of melancholy. .