Can you afford a vacation home
By: Riaterra Marketing Team
Tags: Real Estate, Vacation Rental, Real Estate Investments

Once you are confident in your decision to buy a vacation home, the next step is to consider the costs associated with the purchase.

Mortgage lenders and the IRS will treat your purchase differently based on whether they categorize it as a second home or an investment property, this makes budgeting for a vacation home different than your primary residence.

According to Mortgage lenders and the IRS, an investment property is rented out to generate additional income while a second home is for your own personal use. Taking out a mortgage may be easier for a second home than an investment property, but there are trade-offs when it comes to how you file your taxes.

The content of this article is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

Vacation home mortgages

Unless you are purchasing the home entirely with cash, you will need to apply for a mortgage. Borrowers will prioritize their primary home mortgage, which makes Lenders more hesitant about approving a second home.

Keep in mind that both investment properties and second homes are ineligible for government loans (like FHA, USDA, and VA loans).

To qualify for a second mortgage, you’ll need:

A debt-to-income ratio (DTI) below 41%: This percentage is determined by dividing your monthly debt by your gross monthly income. It essentially tells lenders how much of a financial safety net you have, and if you’d be able to still pay off your loans in the case of unforeseen circumstances.

This percentage is determined by dividing your monthly debt by your gross monthly income. It essentially tells lenders how much of a financial safety net you have, and if you’d be able to still pay off your loans in the case of unforeseen circumstances. A good credit score: Having a healthy credit score is always a good idea, but it’s especially important when buying a vacation home. The higher your score (a 620 or above is considered pretty good) the more likely you’ll be to qualify for a conventional loan (and pay lower interest rates).

Having a healthy credit score is always a good idea, but it’s especially important when buying a vacation home. The higher your score (a 620 or above is considered pretty good) the more likely you’ll be to qualify for a conventional loan (and pay lower interest rates). Cash reserves: In addition to your DTI, lenders may look at how much money you have tucked away. Buyers with a savings account, a growing IRA, an emergency fund, and a college fund appear safer than a borrower with little money to their name.

Mortgages for investment properties

Investment properties usually require more stringent qualifications, higher down payments, and higher interest rates than second homes. This is because investment properties are considered higher-risk — if you run into financial trouble, you’re more likely to walk away from a home you don’t live in than one you do.

Mortgages for second homes

Second homes usually receive better interest rates and require lower down payments than investment properties, but being dishonest about your intentions is considered occupancy fraud.

Lenders typically require that a second home is at least 50 miles away from your primary residence, while a property less than 50 miles away is considered an investment property — because you aren’t likely to vacation in a home so close to where you live full-time.

Learn more about mortgages in our guide to financing a vacation home >

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