With approximately one million people having purchased vacation homes in the last year, this type of residence is gaining popularity for those who are interested in a home in a beach setting or a vacation hot spot – especially since we’ve been on lock down for years now. However, while a second home can seem like a great purchase and solid investment opportunity, there are different requirements that go into this type of purchase. If you’re considering a vacation home, you may want to be aware of the following financial factors.
The Down Payment Amount
If you currently have a primary residence, you may be aware that you can put as little as 5% down on a home, but things are different when it comes to a vacation home. Because you will be taking on an additional mortgage, there is greater risk involved, and this means you will likely have to put in at least 10 percent. In some cases you may be able to put 5% down, but it’s best to speak to your local mortgage professional: find a broker in your area here. Because of this, many homebuyers utilize the equity they have in their first home to make up the down payment.
About The Credit Score
Most people that have a credit score of more than 500 have the ability to use a mortgage product and purchase a home, but if you’re buying a second property, you’ll need a higher credit score in order to facilitate the purchase. Because there is more risk involved, lenders will want to make sure you’re a good bet – a beacon score above 680 should be sufficient. In addition, lenders are looking for good repayment history, active trade lines that are in good standing.
The Income Required
Since you’ve been through the mortgage process for your first home, you’re probably aware that you debt-to-income (DTI) ratio needs to be a certain amount in order to qualify for a mortgage. While your DTI for a primary residence may be a little bit higher since it’s your only payment, this ratio will be lower for your vacation home since it’s higher risk. This means you’ll require a slightly higher income than for your primary residence in order to get approved. It’s important to remember that your income has to be sufficient to cover your primary residence expenses and this new vacation home mortgage, tax, heat & condo fees (if applicable). Since you’ll be using it as a vacation home or a second home, the lender can not use any rental income to help qualify you. If you plan to rent it out, this now becomes a rental property, therefore you will require a minimum downpayment of 20%.
Deciding to purchase a vacation home can be a very exciting concept for many people, but there are a number of different financial requirements that go along with buying another residence. If you’re on the market for a vacation property and are curious about what’s involved, you may want to contact a local mortgage professionals for more information.
