How to Finance a Vacation Home
By Bill Herrfeldt
In good times or bad, mortgage lenders always worry about being paid back on loans for primary residences. But that is doubly true when they are approached by borrowers who want to buy vacation homes, possibly to be near a golf course they enjoy. Because lenders view those loans as more risky, they make rules that are difficult for potential borrowers to follow, even though the homes put up as collateral appreciate in value as much or more than do primary residences. Many golfers decide to buy a vacation home instead of renting one, so it pays to know the ground rules if you're one of them.
Instructions
Difficulty: Challenging
Do your homework before you buy to be sure that you can afford it. Most lenders require that you have at least three monthly payments in reserve to qualify for a mortgage on your primary residence. But if you want to buy a second home, most of them require at least six monthly payments on it, in addition to the requirement of the first lender.
Decide whether you want to rent your second home, or not, because that decision will bear directly on the prospective lender's judgment with regard to approving your application. On balance, it is easier to obtain a mortgage on a second home if you do generate rental income for it; and there are certain tax advantages to be received if you assume the role of landlord. However, you need to prove to the lender that it is highly likely that you will receive income from the property. A good start would be if the seller has a rental track record for the property.
Be prepared to make a much larger down payment on your second home. Most lenders require a down payment of about 5 percent on a first home, but you are likely required to come up with 15 to 20 percent down on a second home. Also, it is likely that you will pay at least 1/2 or 3/4 of a point higher interest on it.
Explore using a home equity loan on your primary house to buy the second. If you have built up a lot of equity in your house, it is possible that you have enough to buy your second home without going through the financing process.
Understand the downside. If you should suffer some type of financial reversal while your new mortgage is in effect, you could lose both your first and second homes if you fall behind on your mortgage. Many who finance second homes require that you give them a second mortgage on your primary home as well as a first mortgage on your second. Should you run into a problem making the payments on your second home, the lender could put both properties into foreclosure.
About The Author
Bill Herrfeldt specializes in finance, sports and the needs of retiring people, and has been published in the national edition of "Erickson Tribune," the "Washington Post" and the "Arizona Republic." He graduated from the University of Louisville.
