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How to Get a Mortgage for a Vacation Home

By on March 12, 2014 in Mortgage

How to Get a Mortgage for a Vacation HomeOwning a vacation home isn’t for everyone due to the cost of buying the home and paying for upkeep when you aren’t there. But with real estate values much lower than in years past, especially in hot vacation areas like Florida, buying a vacation home might be more affordable than you thought possible.

That having been said getting a mortgage for a vacation home can be complicated, so here are some tips to help you along the way.

How to Buy a Vacation Home with a Mortgage

Many vacation home buyers end up paying cash for the property. This makes the overall process much more simple, but if you don’t want to drop hundreds of thousands of dollars down on a vacation home you will need to get a mortgage for the property. Here are some tips on what to expect when looking for that mortgage.

Stricter Qualification Requirements for Vacation Mortgage

Larger Down Payment

The first thing to know is that when you go to speak to a loan officer at a bank you can expect stricter rules to qualify for a mortgage on a vacation property. Whereas a 20% down payment is typical for a first home, a vacation home mortgage may require 25% to 30% down.

Same Debt to Income Rule

One of the biggest problems with buying a vacation home and using a mortgage is that the new debt must be combined with all of your other debt and still fall under normal debt to income rules. When you buy a home most banks wants to see your total debt to income to be below 36% to 38%. When you buy a vacation home with a mortgage that new mortgage is added to your total debt and you still need to be below 36% to 38%.

If your first home mortgage debt puts you at 25% debt to income and your vacation home debt would push you to 45% in total debt to income it may be difficult for you to qualify for the vacation home mortgage.

Similar Interest Rates

Unlike the interest rate on investment property, you should find that mortgage rates for vacation homes are similar to those for your main home. Similar does not mean identical so rates might differ by 0.25% or 0.50% above normal rates. However, considering investment property rates usually run at least 1% higher than normal rates this isn’t that big of a jump.

Paying Cash is Easier

Unfortunately doing a cash transaction is much easier than using a mortgage to buy a vacation home. With a cash transaction you don’t even need an appraisal. There is no underwriting to worry about. You simply make an offer and if it is accepted you do a cash close on the home. Using a mortgage for your vacation property means you have pay and receive an accurate appraisal, you must qualify under the lender’s requirements, and it may take more than 45 or 60 days to finally close the deal.

However, you might find the wait to be worth it if you can use someone else’s money to pay for most of the home while you put down 25% to 30% as a down payment. That leaves at least 70% in your pocket that you could use for other investment opportunities.

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