You have worked hard to provide a roof over your head, but you dream of an additional property to unwind, have fun, and maybe make some money too. Whether your dream includes toes in the sand, mountain air in your lungs, or any other form of recreation, it can become a reality. Maybe you know this is what you want but don’t know how to buy a vacation home. Actually, a very common question we hear is, “Do you have any decent programs for vacation home buyers?”. Absolutely, is the answer. Fortunately, paying cash for a second home is not the only option. There are a lot of creative ways to purchase a vacation home or vacation rental. So, the key steps to owning a vacation property is to find which down payment and financing solution fits the buyer best.
The solutions we discuss include home loans on the vacation home, using another residence, paying cash, sources for down payment, or a variation of each.
How to Buy a Vacation Home – Top 10 Options to Choose From
- Fannie Mae second home purchase loan
- Condo purchase loan
- Conventional loan vacation rental purchase
- VA loan cash out refinance on primary residence
- Conventional mortgage cash-out refinance on primary
- Reverse Mortgage cash-out on primary residence
- Combine a cash out refinance with a vacation property loan
- Buying a vacation home with cash
- Using gift funds for down payment
- Home equity line of credit for down payment
How Much is the Down Payment on a Vacation Home?
Buying an additional residence is not as hard as one may think. When it comes to buying a single family home or town home, Fannie Mae vacation home loans only require a minimum of 10% of the purchase price towards down payment. So, down payment is not a big hurdle when it comes to owning a second home away from home. Now, if a buyer chooses to put down less than 20% of the home price, PMI is required in some form. In addition to requiring a small down payment percentage, there are multiple allowed down payment sources which will be discussed in a moment.
Buying a Condo Vacation Property
Buying a condo has its privileges and is a popular choice when looking for carefree living. Like single family homes and town homes, Fannie Mae approved condos only require a 10% down payment as well. When we say “Fannie approved condo”, it means that the condo must meet certain industry standards. We would request items such as a completed condo questionnaire, declarations and bylaws, proof of all insurances, and a copy of the current budget of the association. Actually, during recent years it has become easier to purchase a condo. Fannie Mae loosened guidelines for more limited condo reviews.. Keep in mind, there are several options to make that down payment instead of a savings account.
Getting Rental Income From a Vacation Home
A tricky area with vacation homes and mortgages deals with rental income. Many want to have a property to vacation in, but also want to rent it out for additional income. Not only does it provide potential income, more so it offsets the expense of owning another residence. Now, buying a vacation home vs rental property needs to be determined early on. The reason is that mortgage loans treat each differently. Rental properties require more down payment and have a little higher interest rate compared to vacation homes. But, down payment may be as low as 15% on rentals.
Keep in mind, this is a slippery slope! So, buyers beware! Do not tell a lender it will be a second home and turn it into a rental immediately. Occupancy fraud is one of the most popular forms of mortgage fraud and it has serious consequences. Therefore, make sure to call it what it is. Even if it means more down payment and rate.
Buying a vacation rental property has some huge advantages. These include possible tax write-offs, using rental income to qualify, easier cash flow, and more.
Alternative Ways to Purchase a Vacation Home
Obviously, getting a loan on the property being purchased is the more common way to buy. But, there are other ways to finance an additional home. Actually, it is possible to get a loan on another property to purchase a second home. Not only are there ways to obtain down payment funds or enough to pay cash. Furthermore, extra funds could be withdrawn for renovating a new vacation home. This could give a buyer an advantage compared to other buyers. Here are a few cash out refinance options to buy a vacation home.
Using a VA Cash Out Loan to Buy a Second Home
A little-known option through VA is borrowing up to 100% of the VA appraised value. Not only that, the borrower may get cash out up to the appraised value too. Funds may be used to pay off the existing mortgage, consolidate debts, or receive cash-out for many reasons. Thus, buying a second home could be a reason for the cash out. Depending on the equity in the primary residence, a buyer could get enough funds to pay cash for the vacation property. Conversely, if there is not enough equity, funds may be withdrawn as down payment. Then, a buyer could have the down payment necessary for the new home purchase. Maybe there is enough funds to avoid PMI on the new home purchase..
Conventional Cash Out Refinance
Just like a VA refinance, conventional loans provide the ability to receive cash out towards a vacation property purchase. On a primary residence, conventional loans allow up to 85% of the appraised value on a primary residence. Additionally, a cash out refinance is available on a rental property as well. Refinancing a property could even give buyers an advantage in the offer stage. Having sufficient funds to pay cash or have a significant down payment could make the difference in a seller accepting an offer.
Reverse Mortgage Cash-Out Refinance on Primary Residence
Seniors have a unique and misunderstood home loan option. Although, there are cash out restrictions, a reverse mortgage could be a tool for buying another residence. Assuming sufficient equity, a reverse mortgage could be used to pull cash out of a primary residence. If enough can be withdrawn to pay cash for the 2nd home, then the borrower will not have a mortgage payment on either property since the 2nd home was paid for in cash and the Reverse Mortgage on the primary requires no payment. Although, property taxes, insurances, and possible HOA dues would still be due. This option allows seniors to live comfortably in their primary residence and vacation in their second residence without stretching their budget.
Vacation Home Down Payment Ideas
So, we have shown how using equity as down payment on another home and the minimum requirements to buy vacation homes. No matter if a full second home or a vacation rental property, there are other down payment sources to make a dream home happen.
Vacation Property Down Payment Sources
- Retirement account withdrawal
- Selling an asset (car, another home, RV)
- Selling investments
- Gift funds
- Traditional savings accounts
Technically, about any documented and legal down payment source is allowed for buying an additional property. Other than making sure a buyer has the required down payment percentage, asset reserves are required too. Which means funds left in a borrower’s account after cash to close. Lenders like to see that a borrower has a cushion in case something happens. Minimally expect 2 – 6 months in mortgage payments of reserves. More is great of course! The required level depends on the automated approval.
Next, buyers need to consider the tax consequences of using certain down payment sources. For instance, pulling funds from a retirement account or investment fund is typically a taxable event. So, while speaking with a loan officer, it is key to involve your financial adviser and/or tax expert.
Should I Pay Cash for a Vacation Home?
A large percentage of vacation property buyers pay cash or at least a huge portion of the price is cash. Of course, a benefit of paying cash would be no mortgage payment. Yet, before following the impulse to just pay cash, fully consider all options. Therefore, consult with your team which includes loan officer, financial adviser, and CPA. In the end, the best decision may be to pay cash. But, what if it isn’t? Paying cash could create a large taxable event for a buyer. Furthermore, paying cash for a house could mean missing out on a financial opportunity or strategy. For instance, borrowing at a low fixed interest rate while keeping investments in place. Hopefully, the investments outperform the loan rate.
Want to learn more about the benefits of buying a home with cash vs. getting loan? Check out this article, “Are You Sure You Want to be a Cash Buyer?“.