How to get a mortgage for a vacation home

Key takeaways

• A fixed-rate conventional loan or home equity line of credit are two types of loans you can get from private lenders for vacation homes. However, the government does not back vacation home loans.

• Getting a vacation home loan usually takes more work than a primary home. It would help to have a higher credit score, less debt, and a more significant down payment.

• A lender in your area can help you understand the rules and find the best vacation home insurance for your home.

Buying a second home is a big step, but it can pay off in both personal and financial ways. There are things you can do to make it easier to finance a vacation home, whether you're considering getting a loan for one now or in the future.

How to get a mortgage for a vacation home

Financing a new vacation home needs a lot of thought and planning, just like funding any other home. Before you buy, think about these things:

Step 1: Decide how you'll use the vacation home

• You usually lived in. If you don't already have a home, you can live in the vacation home full-time. If the price of the house you want to buy isn't more than the conforming loan limit in your area, you can get a loan with just 3% down. You could also get tax breaks as a homeowner.

• Two-story cottage. You'll need at least 10% to 15% down for a loan. You can use the house as a second home.

• Property to rent out. If you live in the house less than 14 days a year and use it as an investment property, it will cost you more to borrow money and require a more significant down payment.

Step 2: Determine what you can afford

Knowing the costs and determining whether a vacation home fits your budget is essential before taking out a mortgage.

Besides your monthly mortgage payment, other costs come with owning a vacation home. Usually, these costs include:

• Fixing and maintaining things

• Home goods and furniture

• Management and open spots (if you rent)

Step 3: Find out about vacation home insurance

Your mortgage lender may require that you buy a vacation home insurance plan if you want to borrow money for a vacation home. These prices change based on the type of property and where it is located. For instance, a house near the beach may be riskier because of the chance of hurricanes and flooding, so the premiums will probably be higher than for homes further inland.

It would help if you learned about insurance and how much it costs before buying a vacation home. You should also include this cost in your budget.

Step 4: Work with a local mortgage lender and a local Realtor 

It's essential to get professional help when buying a home in a new area, even if you've been vacationing there for years. Working with a local real estate agent and an experienced local lender specializing in vacation home loans is a good idea. Local lenders and Realtors will know the rules and specifics of the area you want to buy in. A local Realtor will also know what homes are for sale.

Step 5: Decide how to finance your vacation home 

Once you've found a lender and know how much you can afford, look into your financing options for a vacation home.

• Conventional loan: Most traditional loans for vacation homes are made of a fixed-rate mortgage. This type of loan locks in a specific interest rate for a set amount of time, up to 30 years.

• Fixed-rate mortgage (ARM): You can also get a fixed-rate mortgage (ARM) for a vacation home. With this kind of mortgage, your interest rate stays the same for a certain amount, usually five to ten years. Then, the market rate changes.

• Home equity loan or home equity line of credit (HELOC): If your home is worth more than you owe, you may get either a home equity loan or a HELOC. In this case, your ownership stake is used as security for the loan or line of credit. You could also choose a cash-out refinance, which lets you borrow the value of your home in cash and change your current mortgage into a new, bigger mortgage.

Vacation homes can only get VA or FHA mortgages if the government only backs loans for primary residences or first-time homebuyers. 

Step 6: Compare vacation home mortgage rates 

Mortgage rates for vacation homes are about 0.5% to 1% higher than rates for primary homes. Look around for the best mortgage rates and terms on a second home.

Vacation home loan requirements 

Before you can get a mortgage, some things must be true about you and the vacation home.

If you want to get a vacation home mortgage, you must meet the following requirements: 

• Debt-to-income ratio: Borrowers can sometimes get a loan with a 50% debt-to-income ratio (DTI) for a primary residence. DTI can be as high as 45% for a vacation home. (The borrower can't use rental income as proof of income.) 

• Credit score: Lenders usually want to see a more extended credit history when lending money for vacation homes. You'll need a credit score of at least 660 for a vacation home loan but only 620 for a primary residence mortgage. 

• Down payment: Lenders usually want at least a 10% down payment for vacation homes. Primary homes may only need a 3% down payment. 

• Reserves: You may be able to buy a primary residence with little or no reserves. It would help if you had enough saved for a vacation home to cover two to six monthly mortgage payments.

Freddie Mac says the following things must be valid for a vacation home to be eligible for a loan:

• It has to be a single-family home.

• It can't be a timeshare.

• It has to be suitable for living in all year.

• The borrower has to live there for some time during the year.

• The borrower must be the only one who can use the property.

• There can't be any agreements on the property that give a management company control over who lives there.

Different ways to pay for a vacation home 

You can pay for the vacation home you've been eyeing without getting a mortgage.

• Buy with family or friends: If you're comfortable sharing the vacation home with family or friends, you can split the cost to save money.

• Make a plan to save money: Adding a vacation home savings plan to your budget and putting money into it every month is a long-term goal requiring patience and persistence.

Frequently Asked Questions about Vacation Homes 

Should you invest in a vacation home? 

A vacation home can be a valuable asset that helps you get rich over time and even gives you a steady flow of money. But first, you need to make sure that you can comfortably pay the mortgage payment and any other maintenance costs. Before buying a second home, read up on other essential things you should consider. 

How much does a vacation home mortgage cost? 

A vacation home mortgage will cover the home's purchase price, less your down payment, plus interest and any fees charged to get the mortgage. You may also have to pay homeowner's association and other fees. You'll also have to pay property taxes and insurance. 

What is the difference between a vacation home and a second home? 

Some ways you might use your vacation home could make the IRS see it as a second home. A second home is a house you own and live in in addition to your main home. If you rent it out, you must live there for at least 14 days a year, or 10% of the days you rent it out. 

It is also a second home if you use a vacation home in the same way, staying there for more than 14 days a year or 10% of the days you rent it out.