The COVID-19 pandemic made second-home ownership a necessity for some who fled urban areas and opted to set up rural home offices when commuting to work was no longer a necessity. Vacation home sales were up 57.2% year-over-year in the first four months of 2021, the last period for which statistics were available, according to the National Association of Realtors. Second-home sales far outpaced total existing home sales, which grew 20% in the same period.
Buying a vacation home involves considerations beyond whether you can afford to pay a second mortgage every month. There can be substantial costs to maintaining a second home, stricter criteria for obtaining a mortgage, and concerns that being a homeowner twice over may derail your long-term savings goals, such as building a retirement fund. Here is a second home buying guide that shows how to calculate whether this is the right time for you to start vacation-home shopping.
The requirements to qualify for a vacation home loan tend to be more stringent than a mortgage on a primary residence for most people because lenders view a second residence as a slightly greater risk. For example, the down payment for a second home is typically at least 10% of the purchase price, compared with the 5% or less some borrowers are able to arrange for a primary residence. If an applicant has a low credit score or a high debt-to-income ratio (the amount of your monthly debts relative to your monthly income), the required down payment may be 20% or more.
The borrower may also have to show they have cash reserves to pay at least two months of their monthly mortgage payment on both their primary and second homes. If the mortgage applicant is self-employed, they may need to show that they have up to six months of reserves. The more cash reserves borrowers have available, the more lenient a lender may be about a lower credit score or higher debt-to-income ratio when they apply for a second-home mortgage.
If buyers are considering renting out their vacation home, they should talk to their lender about the number of days they will be allowed to have paying guests or tenants. To qualify for a second-home mortgage, borrowers may be expected to live in the property for a certain length of time each year. If they are buying a second home primarily as a rental property, they may have to apply for a different kind of mortgage that can entail a higher interest rate and stricter requirements for a down payment and credit score.
Renting out a second home within allowable limits can help defray the costs of owning the property. But rental income may not be taken into account when determining whether a borrower qualifies for a mortgage for a second home. Nor should the buyer count on income from paying guests to meet their monthly budget. View any rental income as a bonus, not a necessity.
Just like with your primary residence, you can deduct the interest on the mortgage of your second home on your taxes, provided the total of both your primary- and second-home mortgages do not exceed $750,000. State and property taxes are also deductible up to a maximum of $10,000 per tax return.
Financial experts advise that you not consider purchasing a second home until you are putting away at least 15% of your annual income in a retirement fund, that your separate emergency fund contains at least six months or more of living expenses should you lose your job, and that you have manageable credit card debt.
Avoid buying a vacation home during peak season, whether that means ski season for a mountain chalet or summer for a cottage at the shore. Sellers may be more willing to bargain on price if they have to absorb the costs of locking up their properties during the off-season. Between Labor Day and Thanksgiving is a good time to consider purchasing a summer home, while spring can be ideal for a winter vacation home. Another good time to consider buying is right before the busy season, when some sellers might want to avoid competing with a high inventory of vacation homes for sale during the high season.
While some people can afford to purchase a second home using cash, most need to take out a mortgage. According to a survey by the National Association of Realtors Research Department, nearly half of all vacation home buyers and investors finance up to 70% of their purchase.
On your primary mortgage, you might be able to put as little as 5% down, depending on your credit score and other factors. On a second home, however, you will likely need to put down at least 10%. Because a second mortgage generally adds more financial pressure for a homebuyer, lenders typically look for a slightly higher credit score on a second mortgage. Your interest rate on a second mortgage may also be higher than on your primary mortgage.
Otherwise, the process of applying for a second home mortgage is similar to that of a primary residence mortgage. As with any loan, you should do your research, talk with multiple lenders and choose the loan that works best for you.
Debt-to-income (DTI) requirements for a second home mortgage may depend on your credit score and the size of your down payment. Generally speaking, the more you put down and the higher your credit score, the more likely your lender will allow a higher DTI.
Some homeowners might choose to offset their expenses by renting out their vacation homes when they're not using them. Doing this could violate your mortgage terms because you are using the property as an investment instead of a true second home, resulting in higher risk to the lender.
You have a few options to consider when making a down payment on your second home. You could use a cash-out refinance or open a Home Equity Line of Credit (HELOC) on your current home, or you can use your savings to make the down payment.
If you have built up enough equity in your primary home, a cash-out refinance allows you to tap into that equity, especially if your home has increased in value since you bought it. Borrowers with good credit can typically borrow up to 80% of their home's current value. Before you go this direction, make sure you can afford the larger monthly payment you'll now owe on your primary home.
A HELOC, or home equity line of credit, on your primary residence is another popular option. If you have enough equity in your primary home, you can take out a line of credit and use those funds to make a down payment on your second property. This means you don't need to refinance your current mortgage.
Buying a second home may seem difficult, but if you know what to expect and review your finances, it could be easier than you think. Keep these factors in mind as you think about whether you can afford a second home, and how to get a mortgage for it.
We offer a variety of mortgages for buying a new home or refinancing your existing one. New to homebuying? Our Learning Center provides easy-to-use mortgage calculators, educational articles and more. And from applying for a loan to managing your mortgage, Chase MyHome has everything you need.
Whether you're determining how much house you can afford, estimating your monthly payment with our mortgage calculator or looking to prequalify for a mortgage, we can help you at any part of the home buying process. See our current mortgage rates, low down payment options, and jumbo mortgage loans.
Refinance your existing mortgage to lower your monthly payments, pay off your loan sooner, or access cash for a large purchase. Use our home value estimator to estimate the current value of your home. See our current refinance rates and compare refinance options.
Our affordable lending options, including FHA loans and VA loans, help make homeownership possible. Check out our affordability calculator, and look for homebuyer grants in your area. Visit our mortgage education center for helpful tips and information. And from applying for a loan to managing your mortgage, Chase MyHome has you covered.
Go to Chase mortgage services to manage your account. Make a mortgage payment, get info on your escrow, submit an insurance claim, request a payoff quote or sign in to your account. Go to Chase home equity services to manage your home equity account.
You may have to pay a higher interest rate on a vacation home mortgage than you would for the mortgage on a home you live in year-round, and lenders may look closely at your debt-to-income ratio. Expect a lender to scrutinize your finances more than when buying a single-family primary residence.
A vacation home you use part time and also rent out may be considered rental property for tax purposes, depending on personal-use days as the homeowner, and the number of days you rent it out. If you rent out the vacation property for more than 14 days in a year, you must report the rental income on Schedule E of your individual tax return, and you can deduct the rental portion of expenses such as mortgage interest and property taxes. However, renting out your home as a short-term vacation home for 14 days or less in the year means you cannot deduct rental expenses, but the income from your renters is tax-free.
You can deduct property taxes on your second home, too. In fact, unlike the mortgage interest rule, you can deduct property taxes paid on any number of homes you own. However, beginning in 2018, the total of all state and local taxes deducted, including property and income taxes, is limited to $10,000 per tax return.
Fix-up days don't count as personal use. The tax savings from the loss helps pay for the vacation home. Unfortunately, holding down personal use means you have to forfeit the write-off for the portion of mortgage interest that does not qualify as either a rental or personal-residence expense.
Although the rule that allows home sellers to take up to $500,000 of profit tax-free (up to $250,000 if you're unmarried) applies only to a sale of your principal residence, there is a way to extend the break to your second home: make it your principal residence before you sell. That's not as wacky as it might sound. Some retirees, for example, are selling the big family home and moving full-time into what had been their vacation home. 781b155fdc