Financing a Vacation Property

Thinking about buying your very own vacation property? Many people do right after they rent a vacation property and love the peace and quiet away from city life. They enjoy it so much they decide instead of renting one every year, let’s just buy one of our own! It’s more common than you might think. Getting financing for a vacation property isn’t as common compared to financing a single-family home in a suburban neighborhood. But let’s be clear, financing is available and at competitive terms.

Property Appraisal

The first consideration is establishing value with a new appraisal. Appraisals contain information regarding the sales price of a property and then find recent sales of similar homes in the area. This part may be a challenge for conventional loans because a vacation property might be in a remote area, with few similar properties in the area. The lender wants to see if the vacation property will be attractive for certain types of buyers.

A lender wants to make sure the sales price is competitive in the market and can do so by researching similar properties in the area. With a vacation property mortgage, finding nearby comparable sales is given some degree of leeway. However, marketability is very important to a lender. In a worst-case scenario should the lender have to take back the property and sell it, the lender wants to be assured there is a market for such homes. Once this determination has been made, financing is available.

Vacation Property Occupancy

A second determination is occupancy. Most vacation properties are there to be used a few times out of the year. It’s considered a second home. This is compared to buying a property and renting it out for cash flow. Buying and renting turns the property into an investment home.

Rates and terms for rental properties will be adjusted due to the unit being a rental. You can expect to make a down payment of 20% or more and fixed interest rates can be up to 0.50% higher compared to a primary residence. This is essentially the same rate and term pricing as when financing a traditional home. There may be a slight adjustment but not by very much.

Second Home vs. Investment Property

How does a lender determine whether or not a purchase will be for a second home or as an investment property? It’s fairly simple, really. On the loan application there’s a section that asks about occupancy and what the status of the property will be. If it’s for a second home, the property can’t be located across town in another neighborhood. That’s clearly a rental property and not a vacation home.

Another common way to finance a vacation property is to tap in to the equity of a primary residence with an equity loan. This is possibly the most competitive way to finance a vacation property. Equity loans on a primary residence provide some very attractive rates. There rates will be slightly higher compared to a first lien mortgage but not by much. If there is enough equity in a primary residence to make a purchase, there will be no need to finance the second property.

New Construction

If you’d like to build a vacation property, we can look at a construct-to-perm loan, where financing for the construction as well as a long term mortgage are built into the same loan program.

If you’re thinking of buying, financing or building a vacation property, let’s talk. We’ll go over the details of all your loan options. As a mortgage broker, I have access to multiple loan programs that a regular bank may not have access to. After you’ve submitted an application and provided some initial documentation, I can issue a preapproval letter for you. This assures the sellers that you’ve been qualified for financing to purchase your very own vacation home.