How exciting to dream of having your own cabin on the lake to gather the family and friends for memorable outings. Owning a vacation or second home can bring joy, happiness and a lot of great memories.
In fact, the 2017 National Association of REALTORS (NAR) Investment & Vacation Home Buyer’s Survey showed that 42 percent of those buying a second home do it to use as retreat for family. Eighteen percent plan to convert their vacation home into their primary residence in the future for retirement, and 12 percent bought the place because of low real estate prices.
But before you start making those dreams come true, you first should get preapproved to purchase that second home, says Paul Mitchell, Senior Loan Originator at Austin Capital Mortgage in Houston.
“This will be your second home loan. So, you need to know if you qualify, how much your payments will be, and how your day to day finances will be impacted,” he adds.
What financing is available for second or vacation homes?
The NAR survey revealed that 29 percent of vacation buyers paid all-cash for their purchase. When financing their purchase, 45 percent financed less than 70 percent of their buy. That means they made a large downpayment.
If someone does not pay with cash, they usually go to with a conventional loan, which would be a loan sold to Fannie Mae and Freddie Mac, Mitchell says. Most mortgage companies offer conventional loans which range between 10 and 30 years.
Mitchell says that FHA and VA loan options are only available for your primary residence. That being said, if your second home is going to be your new primary residence, there may be options for a VA loan. USDA may be available depending on whether the area you are purchasing in is designated as such.
About one-fifth of buyers use the equity in their primary residence to make the downpayment on their vacation home. Some use a cash-out refinance on their primary home because they have substantial equity with the rise in home values lately. You might also be able to obtain a home equity line of credit (HELOC) on your primary residence to purchase the second home or use it as your downpayment. This way, you don’t have to refinance your current mortgage.
You also may want to consider buying the vacation home with other family members or friends. Mitchell shares that each person wanting to be on the loan must do a separate application – the only time one application can be done for two people is when they are married.
What is average price of a vacation home?
The typical price for a vacation home is $200,000, according of the NAR survey. That is up from $192,000 the year before. 36 percent bought in a beach area, 21 percent bought on a lake front and 20 percent bought in the country with the typical vacation property being 200 miles from the buyers’ primary residence.
But remember, the price of vacation homes has everything to do with the location, and some areas of the country are much more expensive along the coasts and in bigger cities.
Find a real estate agent that understands second homes
If you will be buying a second home in a resort, recreational or vacation destination, try to find a realtor with that expertise, Mitchell says. They do understand the tax implications of a second home and the vacation lifestyle market. They can help you later on to figure out if you need a property management company to take care of your home when you are not there, and they can tell you how much you can get when renting out the place when you are not using it.
The NAR does offer specialized training and support for agents who work in this niche market, so you can find a Resort and Second-Home Property Specialist (RSPS). Mitchell adds that you should pick a realtor who is active and lives and works in the area that you are choosing.
What should potential vacation home buyers think about way before they purchase?
“First, I would figure out how much I will use it,” says Mitchell. “And then figure out if the place is rentable if you aren’t going to use it. It could help recoup the money you are spending on it.”
How is the vacation home market overall since home prices and interest rates are up?
The NAR survey showed that the share of vacation home buyers declined for the third straight year to 12 percent from 16 percent. The decline puts the share at the historical average for data set collected since 2003.
What is considered a vacation home?
Mitchell says that when lenders look at an application for a vacation home loan that the home has to smell, look and feel like a vacation home.
“It can’t be two blocks away from your current primary residence, otherwise it would be an investment property,” he says. “It has to be next to the water, in the mountains, on a lake or out in the country.” And if you plan on getting rental income from the property, that can’t help you qualify for the loan. It can help defray costs of owning a vacation home, though.
What could be a deterrent for not getting a vacation home loan?
“The biggest factor to keep in mind is whether or not you qualify from an income standpoint,” Mitchell explains.
If your monthly income is tight to maintain both houses and pay for taxes, insurance, upkeep, etc., then getting approved may pose a challenge.
“We follow guidelines, and if it doesn’t work, you either have of find additional funds or another borrower to sign for you, buy down the interest rate or put down a little more,” he says.
