Every year, the real estate sales and brokerage services industry generates more than $225 billion in revenue. Wow. If you’re interested in buying a vacation home, you’re in good company.
The vast majority of people who want to buy a vacation home do so by securing a mortgage loan. However, qualifying for a mortgage on a vacation home can sometimes require certain financial preparations.
In many ways, qualifying for a mortgage on a second home is the same as qualifying for a mortgage on a first home. The main difference is that it is somewhat more demanding.
How to qualify for a second mortgage.
People need to meet certain qualifications before they qualify for a home mortgage. These qualifications tend to include things such as a down payment. You may also need a certain credit score or have a few months’ worth of cash reserves.
By meeting these requirements, there is a good chance that you will receive a great mortgage for your vacation home. However, it is important to distinguish between a vacation home and a rental property.
Some people act as if they are buying a vacation home when they really intend to use it to generate income by renting it out. Of course, there is nothing wrong with renting out a genuine vacation home when you are not using it, for some extra income.
However, if a property is not really a vacation home and is only intended for generating income, then the rules for it will be different.
That means that along with meeting the financial requirements, you will also need to establish that your second house is a genuine vacation home. Among other things, that means that you will have to stay at your vacation home a certain amount of days out of the year.
If you never visit your vacation home, then there is a good chance that it will be classified as a rental home instead and be subject to more complicated requirements.
Choose the right property.
The specific property you choose will have a significant effect on how likely you are to qualify for a mortgage.
The home must be suitable for your own use year-round. This is another requirement related to making sure that your second house is a genuine vacation home. If the house does not seem suitable for your own use, then you may not qualify for a mortgage.
It is also important that you choose a home with a single unit. If you buy a duplex or another home with multiple units, then that will be another indicator that the property may not be a genuine vacation home.
Consider saving for a down payment.
Once you have the right property, you can focus on meeting the financial requirements for your vacation home. When you buy your primary residence, you often have to put 3% down to buy it. However, buying a vacation home often requires a full 10% down.
In fact, that 10% number is in the best-case scenario, when you have a high credit score, and your finances are in order. Depending on your specific situation, you might be looking at a required down payment of 20% or more.
On the other hand, if you want to make it easier to buy a vacation home, you can offer to pay an even larger down payment. Whether you go this route or not, you may need to save up for a down payment. In some cases, the fastest way to qualify for a mortgage on a vacation home is by saving up rather than by looking for other options.
Improve your credit score.
On the other hand, if your credit score is not high enough, your required down payment might be out of your price range. You may get better and faster results by improving your credit score instead of focusing on saving up.
In most cases, building up your credit score takes a significant amount of time. However, you might be able to improve your credit score quickly if you have some debts in collections.
Many people have debts sitting in collections without realizing it. If you discover and pay off these debts, it can have an immediate positive effect on your credit score. That can help you qualify for a mortgage or lower the required down payment to purchase a vacation home.
Make sure you have enough income.
The more debt you have, the more income you will need to lower your debt-to-income ratio. If your debt-to-income ratio is too high, then you will not qualify for a second home mortgage.
Keep in mind that you are not allowed to use the possibility of future rental income to help you qualify for a second mortgage. That means that buying a vacation home requires you to have enough income prior to the point of purchase.
If you can achieve a low debt-to-income ratio, you may enjoy a home loan with more favorable rates. Knowing how to buy a vacation home at all is good, but doing so with low monthly payments is even better.
Understand how to secure a mortgage on a vacation home.
Getting a mortgage for your vacation home can be a great step forward, but it can take significant preparation as well. The more you understand about your eligibility for a mortgage on a vacation home, the easier it will be for you to qualify with a few strategic interventions.
To learn more about buying or selling a first or second home in Florida, reach out and get in touch with us here at any time.