Dream of spending your vacations in a breezy beach house or rustic mountain cabin you can call your own?
If you’re tired of trips spent in cramped hotel rooms and having to do without the many comforts of being in your own home while on vacation, then it might just be time to make that dream a reality.
Considering buying a vacation home? Here’s everything you need to know.
Why Would You Want A Vacation Home?
You might be thinking, “Why wouldn’t you want a vacation home?” Having a vacation home can be a great, fulfilling investment. However, like anything else, you need to take some time to go over your financial situation and think about whether investing in a second home makes sense for you.
If you’re looking to get started with investing in real estate, purchasing a vacation property can be a good way to start. Not only can real estate help you build wealth, but, depending on your loan, you may also be able to rent out your vacation home when you aren’t using it to generate revenue and help cover expenses.
Even if you don’t rent the place out, there are still benefits to owning a vacation home. If you have a particular vacation destination that you head to year after year, buying your own home in that location could make sense. Think about it: If you’re already planning on visiting the area regularly, having a place to stay that belongs to you means you’ll have a place that feels like home even when you’re on vacation. Plus, you can save yourself the hassle of having to figure out lodging every time.
On the other hand, if you’re someone who prefers to check out different locales when you travel, you might not get the same benefit from owning a vacation home.
Vacation Home Vs. Primary Residence Vs. Rental Property
For the purpose of your mortgage, a property is classified into one of three categories: primary residence, second home or investment property.
Generally, vacation homes fall into the “second home” category. A second home is a residence that is occupied by the owner for a portion of the year.
What Is A Second Home?
To be considered a second home, your vacation property:
- Must be occupied by the owner for a portion of the year
- Must be accessible and suitable for year-round occupancy
- Must be a one-unit dwelling
- Cannot be subject to any rental, timeshare or property management agreements
Different lenders will likely have their own additional requirements and restrictions, as well. Be sure to discuss your expectations and intentions for the property with your lender at the beginning of the process.
What This Means For Renting
Simply put, second homes are for you to live in, use and enjoy part-time. They aren’t intended to be used as rental properties.
If you’re interested in renting out your property for the majority of the time and visiting infrequently, you’ll likely have to get an investment property loan. These come with higher rates and more stringent requirements. However, with an investment property loan, you’re able to use part of your projected rental income to help qualify for the loan. You can’t do this with a second home loan.
However, you might be wondering if you’re allowed to do short-term, occasional rentals on a vacation property that’s classified as a second home. With the rising popularity of sites like Airbnb.com, some lenders are now allowing more leeway for vacation homeowners to generate rental income on their properties, provided they occupy the home for a portion of the year. However, be sure to clear this with your lender first.
At Quicken Loans®, the property may qualify as a second home if it’s rented out for no more than 180 days in a calendar year. You must also reside in the home for either 14 days or 10% of the days the property is rented, whichever is greater.
Owning a vacation home can come with many benefits.
For frequent vacationers, having a home away from home means that they have a space that is their own when travelling. Not only will it help you save on lodging, but you can save on other expenses, as well. For example, utilizing the kitchen instead of eating out for every meal will lower your food budget. Having your own home with more space can also make traveling much easier for larger families.
If you’re able to use the home to generate rental income, you’ll also have the ability to offset some of the costs that come along with owning a vacation home.
Even if you’re dubious about investing in real estate, owning a second home means adding a valuable asset to your financial profile that will help you build equity through your mortgage payments.
However, it’s not without downsides.
Although you’ll ostensibly save money on lodging when you go on vacation, you’re taking on a new mortgage with monthly mortgage payments. If you’re still paying off the mortgage on your primary home, you’ll have two monthly payments to worry about.
If you are able to rent out your vacation home for part of the time, that means you have to act as landlord, which can be time-consuming and expensive.
Additionally, while a vacation home can be a valuable asset, like any investment, there’s no guarantee it will appreciate in value. If you’re going into this process with dollar signs in your eyes, you should probably slow down and take some time to calculate your expected gains (or losses) on the home.
While it’s very possible the home will increase in value over the years, you’ll also spend those years paying repair, maintenance and insurance costs. Keep that in mind and try to keep your expectations realistic.
Anytime you take on new debt, you need to tread carefully. While mortgage debt can represent an investment in building wealth, it can quickly become a burden if you find yourself in a financial rough spot.
Buying With Friends
If you can’t afford to purchase a vacation home on your own, you may want to consider asking some friends or relatives to co-own a property that you can all share the costs of and take turns using.
While this isn’t an uncommon situation, it might not be an advisable one.
Sharing a home with multiple people requires a lot of cooperation and compromise, not just when you’re first going through the buying process, but also in the long-term. What happens when someone can’t pay for their share of the mortgage payment? Is everyone else ok with covering for them? What if the person responsible for making payments is late one month? That affects everyone’s credit. Down the road, what happens if someone decides they want out of the deal? Can everyone else afford to buy out their share?
If you’re considering owning a vacation home with another person or a group of people, be sure to plan ahead for any issues that may pop up over the years. While it can certainly be a beneficial agreement, circumstances and relationships can change over the years, and you need to be prepared for that.
The Process Of Purchasing A Vacation Home
Now let’s go over what the process of purchasing a vacation home looks like and what you should expect.
Can You Afford It?
First, you need to consider whether you can afford it. Even if you’re able to rent it out, owning a second home comes with a lot of expenses, and rental income might not completely cover these expenses. You need to not only consider whether you can afford the monthly mortgage payment, but also if you’re prepared to take a loss on the property if you decide to rent it out but struggle to generate significant revenue.
It may be a good idea to discuss your plans with a financial advisor who has experience in this area.
Once you’ve gone over your finances and mapped out what owning a second property will look like for you, you’ll want to make sure you meet the requirements for a second home mortgage:
- Minimum credit score: 620
- Minimum down payment: 10%
- Max debt-to-income (DTI) ratio: 50%
Depending on how strong your financial profile is, a lender may ask for more than 10% down. If you’re having trouble finding the cash, you may be able to use the equity you have built up in your primary home to take cash out for your down payment.
Your lender will also likely ask that you have at least two months of reserves saved up. What are reserves? These are readily-available funds that you could use to cover your mortgage payments if you lost your job or were otherwise unable to generate income to cover your bills. Depending on your lender and credit situation, you may be asked to have as much as six months of reserves saved up.
Once you've determined that you’re eligible and able to take on a second home loan, get preapproved for a mortgage and start looking for an experienced real estate agent in the area you plan on buying in.
Finding Your Dream Vacation Home
“Location, location, location” is an important and oft-cited adage in the real estate world, and is vital to buying a vacation home that will suit your needs for years to come.
Your vacation home should be located in an area you’ve already vacationed in and know you’ll be happy visiting again (and again). You should also consider its location within your chosen area, and whether it’s close to any attractions you frequently visit, such as a beach, as well as other amenities such as a grocery store.
Long Distance Home Shopping
If you plan on buying your vacation property in an area that’s far away from your primary residence, you’ll learn quickly how much of a headache the process can be.
Make sure to budget for travel costs ahead of time, since you’ll likely want to visit the home at least once before you agree to buy it. This is where finding the right real estate agent can make a huge difference. A good real estate agent will help you find the right home from afar so you don’t have to keep travelling back and forth to look at houses.
If you’re considering purchasing a vacation home, you need to consider all of the costs that will likely pop up, not just the price tag on the house.
Maintenance And Repair
The costs of regular maintenance and repair often surprise new homeowners, and your vacation home is no exception. Make sure you’re prepared to cover these costs.
One rule is to budget 1% of the home’s purchase price for maintenance. While this may not be a perfect measurement, it can be a good rule of thumb for calculating how much you should have in savings. You should also consider the home’s age and condition; older homes will likely be more expensive to maintain.
Figure out how much you’ll spend on insurance, especially if you plan on purchasing in an area that’s close to water. These locations are often at risk for hurricanes and flooding, and you may need to purchase additional policies to ensure you’re covered in the event of a damaging storm.
Don’t forget to consider the tax implications of your vacation home purchase.
Second homes do qualify for the mortgage interest tax deduction. However, if you plan on renting, keep in mind that you must use the home for more than 14 days or more than 10% of the days when you would normally rent it out, whichever is greater. Otherwise, you won’t qualify for this deduction.
Additionally, if you rent your home for fewer than 15 days, you don’t have to report the income to the IRS. If you rent for 15 days or more, you’ll have to report the income, but you may be able to deduct any related expenses.
Keep in mind, these are IRS rules related to the tax aspect of owning and renting a second home. Your lender will also have its own rules related to renting and rental income that you’ll need to know, as well.
Get Into Your Dream Vacation Home
Ready to make the leap and buy a home in your favorite vacation spot? Let us help! Start your application online with Rocket Mortgage by Quicken Loans® to begin the process.