Looking for a vacation home might just be more fun than looking for a new everyday home. With the daydreams of long weekends and extended vacations in your new home can still come the usual buyer stress. Even though you’ve purchased a home before, it’s important to remember that not every part of the experience will be exactly the same when buying a vacation home. One of the key pieces of purchasing a vacation home is financing– the good news is that it can be a straightforward, and painless process! Here are some simple tips and things to consider:
GET YOUR CREDIT IN ORDER.
As always, when purchasing any type of real estate, the state of your credit is a significant factor in how smooth the financing process will be. Your credit score will likely need to be in the mid-600s to qualify for a mortgage on a vacation home. Of course, the higher your score, the more competitive the interest rate you’ll be able to secure. If you know you’ll be considering a vacation home in the near future, check your credit now so you can take pre-emptive steps to strengthen your score if needed.
WILL A VACATION HOME MORTGAGE AFFECT THE MORTGAGE ON MY CURRENT HOME?
A vacation property won’t affect your mortgage on your current home. Your lender will want to understand your total housing expenditures between both, your primary and secondary residences, to make sure it’s in line with your income and other expenses.
SET SAVINGS GOALS.
Just as your lender will take into account how much you can afford, given that you already have a home, you should do the same. Start by figuring out how much money you’ll need to save for a down payment.
For your primary residence, targeting a down payment of 5-20 percent of the total purchase price is typical, however, the minimum down payment for a second home may be higher. You may need to start with 20 percent to get the best rate possible and avoid paying mortgage insurance.
In addition to the down payment, you’ll also need to account for the cash needed to cover closing costs and any reserves if required. Reserves range from 2-6 months of income that you would need in order to pay your mortgage in the event you experience an interruption in income.
Once you understand your savings goals there are many ways to make saving your targeted amount easy—like automating your savings, cutting back on unnecessary subscriptions, and paying off credit debt.
UNDERSTAND THE TOTAL COSTS.
The idea of a vacation home is a fun one, but it also comes with some extra responsibility. For example, maintaining two households could end up being more costly than you planned. Don’t forget to account for the cost of traveling to and from your vacation home, regular maintenance, HOA fees, repairs or upgrades, utilities, furnishings, and household items.
You may be able to offset some or all of the costs if you rent out your vacation home from time-to-time. Keep in mind, though, that some financiers will have restrictions on this. Come tax time, you may also be able to write off your mortgage interest and property taxes, effectively reducing the overall cost.
BE READY TO PROVE IT’S YOUR VACATION HOME.
It’s typically easier to get financing on a vacation home than it is for an investment property, so your lender will want to know that the home will actually be used by you for vacations and not by renters for additional income. Usually, this means that your vacation property should be at least 50 miles away from your primary residence and you’ll need to confirm that you don’t have any plans to lease out the vacation home for large chunks of time.
KEEP THE FUTURE IN MIND.
If you don’t convert your vacation home into your primary residence at some point in time and, instead, sell without purchasing another vacation home, you’ll pay taxes on the gains.
Whether you’re planning to vacation in or somewhere else, the best way to ensure the future of your vacation home is to work with a real estate professional. Reach out for more details on how to get started!