Financing options for second homes and vacation homes
Second home (vacation home) financing has its own special underwriting guidelines and product offerings. Here, Mark Wells at Preferred Financial Services answers common questions he receives from customers looking to buy or refinance a second home.
How do lenders define a second home? Very specifically—a second home must meet the criteria of being at least 100 miles from the borrower’s primary residence, retained for the borrowers’ personal use, and/or be located in a ‘resort’ setting. Resort settings can include lake, beach, and mountain areas, and if the resort setting is evident, the 100-mile distance can be waived.
Can a condo be considered a second home? Yes it can. However, there are numerous restrictions on vacation condos: there cannot be an onsite rental office (sometimes referred to as a ‘condotel’), nor can the complex be operated as an overnight rental facility. It cannot be part of a time share system and must meet the standard condominium guidelines of Fannie Mae and Freddie Mac in regard to the percentage of units that must be owner-occupied or held as second homes.
I would like to buy a beach house. Can I rent out my beach house and still call it a second home? Yes, but you must be careful that you properly report the home status to the IRS on your tax return. On the federal tax Schedule E, where rent income is reported, there is also a box where you acknowledge whether you retained personal use of the house for the required 15 days out of the calendar year. As long as that box is checked, most underwriters will allow for rental income to be earned without voiding the second-home classification. Although there may be tax advantages to listing the home as investment property on your tax return, you must weigh that advantage against the much higher interest rates and higher down payments associated with an investment property.
I have heard that you have to put a lot of down payment on a second home. Is that true? That ‘rumor’ was true for a number of years after the 2007 crash, but is no longer true. Second-home financing can be done up to 90 percent loan to value (10 percent down payment). There is a PMI premium associated with any loan using less than 20 percent down payment, but new ‘no-monthly-PMI’ programs are available for second-home borrowers who have higher credit scores.
Is the rate on a second home a lot higher? Not at all. The borrower can receive the same rate on a second home as they could on a similar primary residence. There is no rate penalty.
I have been helping Upstate clients purchase vacation homes for over 25 years. If you have a question or comment, I can be reached via phone at 864-235-9596 or email at Mark@TheGreatestRates.com.
Or Text Me Now! 864-430-4856
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