How Vacation Property Is Financed
These days, lenders tend to treat vacation properties as they would primary residences. With the proper credit and a 20 percent down payment, it's relatively uncomplicated to get a loan for a second home as long as you plan to use the property the majority of the time.
Keep in mind, though, that if you ever hope to rent the property, you'll have to prove to your lender that you are adequately insured for fire and personal accidents on your property. You'll also have to confer with your tax professional to make sure you are handling the revenue and expenses for that property like a business. Renting is definitely a great way to cover the cost, but lenders can factor in a vacancy rate of between 20 and 30 percent when determining your ability to pay the loan. That means that if you're going to rent, you're going to have to have the financial wherewithal to keep the payments going if no one rents for the time period you have open.
Everyone mails a bill late once in a while for any number of reasons. But be extremely careful about how late you are. Credit agencies put a black mark on someone who's not paid after thirty days, a blacker mark after sixty days, and so on. If this is a chronic problem for you, you need to fix it.
You'll also have to make a study of what the market will bear because you need to price your rent 10 to 20 percent higher than what you're paying the bank just to cover maintenance and security issues since you're not living close to that home. Also keep in mind that people like to rent vacation property in the summer and close to the holidays for family get-togethers. Are you willing to give up prime time in your dream vacation property just to earn some income? Here are some of the things you should know when shopping for vacation property:
Make sure the property is somewhere you love to be. If getting to the property or staying there becomes a drag, it's not a worthwhile investment.
Start your mortgage search early, particularly if you still owe money on your primary residence. Lenders might quote you a low amount for your vacation home based on all of your standing credit balances.
As usual, try to cut your unsecured debt as much as possible before heading to the bank.
If you have your heart set on waterfront property, it's going to cost more not only for the land and structure, but you'll be paying more in insurance costs — if you can get insurance in that particular area. (If you're buying in a hurricane zone, for instance, coverage can be terribly expensive if it's available at all. Don't buy until you know you can afford to protect the property.)
Spend time interviewing real estate agents before selecting one who knows prime property in that area as well as good lending resources in case your home lender doesn't lend out of your community or out of state.
It's easy to fall in love with the idea of vacation property, but borrowing for a purchase for personal or rental use involves its own investigation.
Lenders are generally more tolerant of first-time landlords who are living in the building they're buying. For vacation property, you either need to take a course of study or be able to prove to the bank you have a clear business strategy for renting out your property to part-time tenants.
