Things to Know When Financing a Vacation Home

1. You will need a good credit score. Typically, lenders want to see a credit score of at least 660, usually higher. A few will consider scores as low as 620, but that’s not the norm and everything else about your loan application would need to be nearly perfect. For example, you would need a very low debt-to-income ratio and a stable job history. In addition, your lower credit score means you will pay a higher interest rate.

2. You will need documented income. Unlike 10 years ago, when loans were ultra-easy to come by, lenders now want proof that they are taking a reasonable risk when lending money. If you can’t document that you have adequate income, you won’t get a loan, even if you have ample assets. This is often a major stumbling block for buyers who are self-employed. (See #3)

3. The lender will judge your income by your income tax returns. This means if you are self-employed and you’ve taken lots of deductions in order to show very little income, you may not qualify for a loan. If this is your situation, you may want to reconsider your tax strategy and start claiming more income because your lender will want to see at least two years of adequate income reflected on your returns.

4. Your lender will require at least a 10% down payment. There are no “zero down” or “low down payment” programs for second homes.

5. Conventional loans are limited to no more than $417,000. If you need to borrow more than $417,000, you will need a “jumbo loan.” * To qualify for a jumbo loan, you will need a higher credit score (typically 720 or better), a bigger down payment (20%) and you will pay ¼ to ½ of a percent higher interest rate.

* Some lenders offer “combo loans”, which are a combination of a convention loan and a home equity line of credit (HELOC) which will eliminate the need for a larger down payment and interest rate premium.

6. There is a difference between buying a vacation home and buying a home that’s rented to other people to use for their vacations. The first is a second home and it qualifies for the financing listed above. The other is an investment property and it does not. Lenders go to considerable lengths to verify your intentions and put you in the appropriate loan program.

7. If you plan to rent out your home when you or your family is not using it, your lender will insist that you apply for an investment loan. Investment loans have even higher down payment requirements (25-30%) and the interest rate is about one additional percent higher. If you lie about your intentions, you run the very real risk of being charged with loan fraud, which is a serious federal offense. That having been said, no one can predict what the future will hold. What matters is your intentions for the first year. If you say you intend to use it as a second home, but two months after closing, the lender sees you advertising it on vrbo.com, you may have a problem.

8. The location of your vacation home must be at least 50 miles from your primary residence or it must be in an area that would “make sense” as a second home. For instance, a lender would probably object to a homeowner in Wilmington purchasing a vacation home in Leland, but not in Wrightsville Beach or Kure Beach. If a lender determines (at their sole discretion) the location of your vacation home does not make sense, they will put you in a more expensive investment loan program.

9. Most lenders will require you to demonstrate that you have six months of mortgage payments (including principle, interest, taxes, insurance and HOA dues) in reserves (i.e. savings.) If you don’t, your loan may not be approved.

10. HELPFUL HINT: when looking for a lender, shop around. Call at least three to compare not just their interest rates, but their programs and all of their fees. Different lenders offer different loan products and one may tell you they can’t help you, but the next will have a perfect solution for your situation.