Are you a snowbird who likes to escape the cold during the winter months? Or an explorer who enjoys venturing out to the mountains for some outdoor fun? A vacation home can be an excellent investment for you. You’ll have the opportunity to visit the places you love the most in the comfort of your own home, saving you the hassle of looking for a hotel or Airbnb. In this blog post, we’ll discuss the ins and outs of vacation homes and how you can become an owner!
WHAT IS A VACATION HOME?
A vacation home is a second dwelling other than the owner’s primary residence. It is usually a home that someone buys and only lives in for a certain period of time or season. For example, a beach house. The owners use it in the summer and when they are not staying at their vacation home, they may end up renting it out for the winter – or they may not rent it at all. Just like any primary residence, a vacation home can be any type of property, but they are typically condos and cottages.
For a vacation home to be considered a residence, it must have sleeping spaces, cooking facilities, along with bathroom facilities. The vacation home must be used for at least 14 days of each year for personal purposes or 10% of the total number of days it is rented at fair rental value. Also, if the vacation home is rented for more than 15 days each year, the income must be reported to the IRS.
The requirements to secure a loan for a vacation home are slightly different than securing a loan for a primary residence. As opposed to needing a debt-to-income ratio of approximately 50% for a primary residence, a vacation home requires a debt-to-income ratio of 43% or higher.
With an FHA loan, you can secure a primary residence loan with a credit score of 500. You will need a credit score of at least 640 for a vacation home. Typically, you can get as little as 3% down on a primary residence loan, but a vacation home will require at least a 10-15% down payment. The mortgages on vacation homes normally have higher interest rates since there is a higher risk of default as owners would likely keep their primary residence in case of a reversal in their funds. Lastly, most primary residences do not require any reserves for a loan, yet for a vacation home you may need reserves that are equal to 2-6 monthly mortgage payments.
Besides these many requirements needed to fund your vacation home, there are some other factors you need to think about before purchasing a vacation home. If you are planning on purchasing a second home, you should consider the distance from your primary residence. In case of any storms or emergencies, it is best to be able to check on the home without having to travel far. It is also important to be able to have regular check-ins to make sure there has been no theft or vandalism of the home. You will also want to consider your cash flow and how another mortgage payment may affect other areas of your life and your responsibility of expenses. You may want to consider renting the home during certain seasons to offset costs while still enjoying your home away from home.
Be sure to consider these factors carefully before moving forward with purchasing your vacation home. A vacation home can be a great investment opportunity if there’s a special place you love visiting years after year. If you’re ready to buy your dream vacation home, let’s chat! Our Loan Officers are here to help you with this exciting investment.
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