Buying a vacation home can be a smart (and fun) investment. But, from getting a mortgage to setting a renovation budget, there is a lot to consider before making the leap.
Say you’ve picked out the perfect location for your vacation home, and you’ve already planned the six months that you will “winter” in your sunny destination. But, you start filling out paperwork and realize you haven’t even thought about financing. Or getting a mortgage, let alone budgeting for ongoing maintenance.
Here to help you consider all of these points and more is the home and auto insurance
super app, Jerry
. This guide will tell you everything you need to know about buying a vacation home, from choosing a location to how to find the best home insurance
. What to know about vacation home mortgages
If you’re buying a second home, you’ve already gone through the mortgage approval process for your first home. Understandably, you’d expect getting a second mortgage to be just as easy as the first one, but while the process is similar, there are some different rules and requirements for getting a mortgage on a second home that you should consider:
Mortgage options
There are two main ways to finance a second property or vacation home:
Use a conventional loan: The process of taking out a second mortgage is very similar to your first but with slightly stricter requirements (like a higher credit score). Because you’ll already have debt from your first mortgage, lenders will want to be sure that you can keep up with two monthly payments.
Use a home equity loan: You could use the existing equity in your primary home to pay for some or all of your second home by doing a cash-out refinance of your primary home.
You also could combine and use both home equity and a convention loan to pay for your vacation house. For example, you could use a home equity loan to pay for the down payment on your new house while using a convention loan to cover the rest of the cost.
Finding a lender
Finding a lender for your vacation home mortgage isn’t quite as cut and dry as it is for a primary residence. It’s smart to look for a lender that specializes in second homes—financing a vacation house can be tricky, and they’ll know exactly how to handle it.
Financing a second home requires that you be able to afford the payments on two mortgages. Because second mortgages are a greater financial risk for lenders, they typically require more money up front and a higher interest rate from buyers.
In addition, if you plan on renting out your vacation house, the lender may be confused about whether they should finance it as a second home or as an investment property. This is an important distinction because it’s easier to qualify for second home financing.
Lastly, suppose you’re purchasing your vacation home with an unrelated individual. In that case, the lender wants to ensure the property won’t be collateral damage if you and your partner(s) have a falling out. So, most likely, they’ll ask for an agreement in writing that shows how the property will be owned and operated if one party backs out.
Key Takeaway While you may be familiar with the process of taking out a mortgage, it is a little more complicated for a second home.
Home loan requirements for a vacation home
Vacation home loan requirements are similar to your primary mortgage, but there are some key differences. For example, you’ll need at least a 10% down payment, and this is generally non-negotiable.
Additionally, you’ll also need a credit score of at least 680. However, if you can pay a down payment of 25% or more, the mortgage lender might bump that number down to 640 to 679.
Lastly, you’ll need a debt-to-income ratio (DTI) that’s 36% or less, which is the percentage of your income that goes to your monthly debts (like your first mortgage or car loan).
Depending on the lender, however, there may be some flexibility in requirements. For example, if your DTI is above 36%, they may still grant you a loan if you can make a big down payment or have a high credit score.
What to consider before buying a vacation home
Buying a vacation house in your go-to getaway spot certainly sounds like an amazing prospect. But even if you have tons of expendable cash, there are pros and cons to purchasing a second home. Here’s what you should consider:
Real estate values
While real estate markets constantly fluctuate, the market seems only to go one way in popular vacation spots: up. Whether you’re renting the home out or using it for yourself, owning property in a hot market can only help your investment portfolio.
Still, before you leap, ask yourself if now is the best time to purchase. If your desired area is experiencing a highly inflated market, you may want to wait to avoid overpaying.
Flexibility vs. reliability
With a vacation home, you have a go-to vacation spot anytime you want it without the hassle of finding a place and making reservations. But, you sacrifice flexibility for the reliability of your own place.
If you want to see the world and go somewhere new on every trip, you may find that you’re limited if you’ve spent the money on a vacation home. Consider your wanderlust before putting down roots somewhere new.
Available funds for customizing your vacation home
You might have the funds to purchase a vacation home, but do you have enough money to hire a contractor for renovations? Even if you’re lucky enough to snag a house in your favorite destination, it’s unlikely that it will be furnished or decorated in the way you prefer.
Renovation is especially important if you plan on renting out the property. The more visually appealing and equipped the property is, the more people will want to stay there. For example, guests will likely want to prepare their own meals while away, so they’ll probably look for a place that offers updated appliances, a table to dine on, and a well-stocked silverware drawer.
Pro Tip When renovating your vacation home, choose furnishings and materials that will last a long time to save money in the long run. For example, opt for durable tile or laminate flooring instead of easily-damaged carpet or hardwood.
MORE: How to hire a contractor for home renovations
It’s a large financial investment
Housing prices in popular vacation spots, such as near the beach or on a lake, often sell for well above asking. Therefore, it’s important to stick to your budget and set a maximum amount you’re willing to spend before starting the bidding process.
In addition to the monthly cost of a mortgage, make sure you consider things like down payment, closing costs
, renovations, and upkeep in your budget estimate. And remember, owning two homes means paying double for almost everything, including water bills, sewer bills, property taxes, and home insurance
. Property maintenance
Whether you plan to rent out your vacation property or use it for yourself, you’ll need to handle home maintenance. Remember, some locations require far more upkeep than others: coastal properties, for example, need to be treated to prevent mold and mildew frequently.
Whether you’re a DIY-type or you plan on hiring someone for cleaning and care, remember to consider upkeep when creating your budget.
How to buy a vacation home
There are a few steps you can take now to help you move through the home buying process quickly:
Decide what kind of vacation home you want
First, think about your ideal retreat. Is it a remote mountain house on a lake? Bright and modern home on the beach? Or maybe an upscale apartment in the downtown area of your favorite city?
Because it’s such a significant investment, take the time to choose something that truly reflects your lifestyle.
Determine how you’ll use the home
Determining if you’ll use the property as a second home or an investment property has financial implications. For example, if you are planning on renting out your vacation home for the extra income, you likely won't qualify for a second home mortgage.
Therefore, it’s essential to know your intentions in advance, so your mortgage broker
can offer you appropriate loan options. Set a budget
Set an affordability budget. Even if you can technically afford a second home, it’s vital to make sure you can comfortably afford it. As discussed, there are a lot of ongoing expenses that come with owning a second home.
If you’re in a good spot financially now, you certainly don’t want the purchase of a vacation house to leave you struggling to pay the bills.
Qualify for a vacation home mortgage
Once you’ve made the initial decisions, the next step is to see if you qualify for a mortgage. Getting preapproval is a vital step in buying a home for several reasons. First, it lets you know exactly the type of house you can afford, so you don’t waste your time looking at properties that aren’t in your budget.
More importantly, it shows sellers that you’re serious about making an offer and gives you a leg up on the competition. Having a preapproval letter can be the thing that makes the difference between you getting the home of your dreams or not, especially in a highly-desired destination.
Find your home and make an offer
Now for the fun part: start browsing Zillow and Realtor.com for your fantasy home! Create a list of neighborhoods and houses you’d like to look at, then contact a local real estate agent. Having a realtor who’s familiar with the local market on your side is an absolute must.
Your realtor will be in your corner every step of the way. Not only will they find and show you properties that meet your requirements, but they’ll also make sure you get the best price possible in the end.
Pro Tip The more experienced the real estate agent, the better off you’ll be. Make sure you interview at least three people before making a decision: find out how many active clients they have right now, what their specialty is, and how familiar they are with your desired area.
MORE: How to buy a house before selling your current house
Should I rent out my vacation home?
There are three main ways you can choose to use your vacation home:
As your primary residence: If you don’t already own a house, you may choose to live in your vacation home full time. In this instance, you may be able to get a government-backed loan with a credit score as low as 500 and a down payment as low as 3%.
As your second home: If you choose to use your vacation house as your second residence, you’ll need a minimum credit score of 640 and will likely have to pay a much higher down payment.
As a rental property: Using your vacation home as a rental property may produce enough income to cover monthly mortgage payments throughout the year. Still, you’ll need at least 20% down and the interest rate will be much higher.
Home insurance for vacation homes
In some instances, your mortgage lender may require a separate homeowners insurance policy for your vacation home. This type of policy is known as “vacation home insurance” and it covers a house you own but don’t live in full time. Plus, if you plan on renting it, you may need additional coverage for liability, bodily injury, and medical payments.
Luckily, finding a homeowners insurance policy that fits your needs doesn’t need to be hard. Home and car insurance
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