Your Guide to Turning Your Dream Vacation Home into Reality
Do you ever return from an amazing vacation wishing you could have a piece of that paradise for yourself? Acquiring a vacation home in your favorite destination is not only a great investment, but it can also allow you to create cherished memories for years to come.
Mortgages for vacation homes are increasingly accessible: According to data from the National Association of Realtors, vacation home sales skyrocketed in 2020 by 14%, making up a little more than 5% of total housing stock. However, in recent months, as a result of rising interest rates and high inflation, second home sales are way down. According to data from Reuters in late 2023, “US vacation home sales have fallen by almost 75% from 2020.”
The demand for vacation homes has stayed relatively steady, but more and more buyers don’t have the means to qualify for a second mortgage, which can have restrictive qualifications. Certain economic factors have made it substantially more difficult to qualify for mortgages for vacation homes.
At Defy, we’re committed to expanding opportunities for all types of buyers – that includes those who are looking to get mortgages for vacation homes.
Furthermore, nowadays, vacation homes can also be high-income investment properties. Due to AirBNB, VRBO, and other short-term rental platforms, the expected income stream from a vacation property can help you qualify for a vacation home. That’s one of the many options we’ll explore below.
Loan Options for Financing Your Vacation Home
There are a variety of loan options available for financing a vacation home, including qualified and non-qualified mortgages.
Conventional loans are on qualified mortgage option, but they can be incredibly restrictive for most borrowers. According to data from the FHFA, the average debt-to-income ratio for a first-time homebuyer in 2023 is averaging close to 40%, and it’s been in the 30-40% range for the past five years. For most lenders, the maximum DTI ratio for a vacation home is 45%. If you’ve bought a home in the past five or ten years, it would be almost impossible to afford a vacation home on that basis alone.
However, there are non-QM loan options that might make it a bit easier. These include bank statement loans, interest-only options, profit and loss (P&L) loans, foreign national loans, and debt-service coverage ratio (DSCR) loans.
Factors to Consider When Shopping for Mortgages for Vacation Homes
- Determine the intended use of your vacation home: Second residence or investment property?
Most mortgage lenders define vacation homes (or second residences) and investment properties differently.
A solid rule of thumb is that if you’re planning on renting it out – even if it’s just for a few weeks a year – it’s an investment property. Even if you’re primarily planning on using the vacation rental for yourself and you’re only going to put it on AirBnb or VRBO to make some money on the side, it’s still technically an investment property.
A second home is a property that you intend to live in or visit part of the year. Depending on the state, there might be a minimum of time you even need to reside there.
- Set a budget
Setting a budget is crucial for affording your dream vacation home. First, consider all the costs involved, not just the purchase price. Begin by assessing your current income, expenses, and any existing debts or financial obligations. Factor in additional costs associated with owning a vacation home, such as property taxes, insurance, maintenance, and utilities. If it needs renovations, you should consider that, as well.
- Research loan options
Some loan options for mortgages for vacation homes include qualified, conventional mortgage options as well as non-QM options, like bank statement loans, P&L loans, interest-only loans and more. If you’re self-employed, these can be good options.
- Find a mortgage lender
Next, you should apply to a variety of mortgage lenders to see if you qualify. Look for lenders with experience in financing second homes, since requirements can differ from primary residences. Finding a private mortgage lender can make the process much easier than a traditional bank that has stricter requirements.
- Compare interest rates
Interest rates on second homes and investment properties are typically a little bit higher than they are for primary residences. It’s important to shop around and obtain quotes from multiple lenders to ensure you’re getting the most competitive rate possible. While the interest rate is a significant factor, also consider the annual percentage rate (APR), which includes additional fees and costs associated with the loan.
Requirements for Mortgages for Vacation Homes
While there are other loan options available, such as interest-only, foreign national, and P&L loans, we’ll only be covering the requirements for the most popular loans below.
Conventional Loan Requirements
When using a conventional loan to buy a vacation or second home, the requirements can be much steeper than the other options:
- Credit score of at least 650
- DTI ratio of less than 45%
- Down payment of at least 10%
- Cash reserves of two to six (or more) months
Furthermore, according to Freddie Mac:
- It can’t be a timeshare.
- It must be suitable for year-round occupancy.
- Property’s occupancy cannot be controlled in any way by a management firm (it needs to be personally managed).
DSCR Loan Requirements
There are other loan options, like a debt-service coverage ratio loan, that consider the income produced by the property to help borrowers qualify. The loan is secured by the income stream, and you can use this to qualify to purchase a vacation home as an investment property.
- Credit score of at least 620
- Max LTV of 85%
- ARM/Fixed Options
- DSCR ratio of 0.75 (learn more on our DSCR article)
- Low document requirements and no tax returns necessary
Bank Statement Loan Requirements
Requirements, of course, vary by lender. At Defy, our requirements for bank statement loans include:
- Credit score of at least 620.
- Max LTV of 90%
- Max loan amount of $6mm
- ARM/Fixed options
- 12-24 months of bank statements
Interest Rates for Mortgages for Vacation Homes
Factors influencing interest rates for mortgages for vacation homes include the borrower’s credit score, debt-to-income ratio, loan amount, and the property’s location and condition. Generally, interest rates for vacation homes tend to be slightly higher than those for primary residences, but it’s entirely possible to find interest rates that are highly competitive with other loan types.
If you’re interested in learning more about interest rates on a particular property, you can schedule a call with us so we can send you a more detailed offer.
Is a Vacation Home a Good Investment?
Depending on your financial situation, a vacation home can be a very good investment. Similar to owning a home in general – you establish equity. Vacation homes are typically located in desirable areas with growing populations and lots of amenities. As many of you may well know, vacation homes aren’t cheap – and that’s for good reason. The tourism industry already makes up 11.4% of the global economy, and 2024 is setting records for all time highs.
Mortgages for Vacation Homes FAQs:
- How can I finance a vacation home?
You can finance a vacation home through a conventional mortgage or a non-qualified mortgage, like bank statement loans, DSCR loans, P&L loans and more.
- Is a vacation home considered to be a second home?
A vacation home is considered to be a second home only if you don’t get income from it. If the property generates income (even for part of the year), it’s considered an investment property.
- How does owning a vacation home affect my taxes?
Generally, you may be eligible for tax deductions on mortgage interest, property taxes, and certain expenses related to the upkeep of the property. If you rent out the property, many expenses can be tax-deductible. Consult with a tax professional to learn more.
- Can I use an FHA loan to buy a vacation home?
No, the FHA doesn’t insure second mortgages. FHA loans are intended for borrowers who want to purchase a primary residence, which is defined as the home where the owner lives for the majority of the year.
- What are the qualification requirements to get mortgages for vacation homes?
This varies by loan type, but generally you’ll need a FICO of 620 or more, a down payment of 10-15%, and a DTI ratio below 45% (if conventional) or a DSCR ratio of 0.75 (if it’s an investment property).
- What credit score do I need to qualify for mortgages for vacation homes?
Typically, you’ll need a credit score of 620 or more to qualify for a vacation home mortgage.
- How much do I need for a down payment a vacation home?
Down payment requirements for vacation homes depend on the loan type, but generally you’ll need to put at least 10-20% down.
- Can I get a mortgage for a vacation home with no money down?
There are options available for some borrowers to qualify for vacation homes with no money down, however, we do not offer those at Defy. Generally, however, you’ll need a down payment of 10-20%.
- What are the pros of using a non-QM mortgage to finance a vacation home?
Non-QM mortgages can allow you to use the property’s income to qualify. Since conventional mortgages typically require you to have a DTI ratio of 45% or less, this makes owning a vacation home much more of a possibility. Not to mention the wider variety of loan types, less strict credit requirements, flexible underwriting standards, alternative forms of income verification and more.
- Where can I find a lender for mortgages for vacation homes?
Defy offers options for vacation home mortgages, including bank statement loans, P&L loans, interest-only loans, foreign national loans and more. If you’re interested, talk to us today.
- Can I rent out my vacation home and for how long?
Yes! You can rent out your vacation home for as long as you like – but only if it’s an investment property. If you told the lender that your property is a second home and you intend to use it solely for personal reasons, you might be in violation of your contract if you decided to rent it out. Please keep in mind that rules and regulations may vary by state.
