How to Get a Mortgage for a Vacation Home

How Do You Get a Mortgage for a Vacation Home?

Turning your vacation home dream into a reality may seem daunting at first, but it's doable if you follow these steps.

1. Set a Budget

Before you get too deep in the process, take a moment to assess whether you can afford the total costs of owning a home. This includes a second mortgage payment, property taxes, homeowners insurance and regular maintenance.

Consider the stability of your income and overall financial situation. Even if you plan on renting out the property, you'll need to be able to cover periods when it sits vacant or brings in less income than you expected. Going over your finances and homeownership costs can help you dial in an affordable price range so you can enjoy your vacation home with less financial stress.

Learn more: How to Make a Budget

2. Consider How You'll Use the Property

You should have a good idea of how you want to use the additional property by the time you apply for a mortgage, as it could affect your loan and taxes.

• Second home: A second home is a place you might live on weekends, summers or another part-time basis. Expect to make a larger down payment and pay a mortgage rate that's about 0.25% to 0.50% higher on a second home mortgage than on your primary residence.
• Investment property: This is a property that brings in income, usually through rent. For tax purposes, the IRS classifies it as an investment property if you live in it less than 14 days during a tax year or 10% of the days it's rented. Many lenders follow that rule and charge higher mortgage rates for investment properties.

3. Get Preapproved

It's wise to get preapproved for a mortgage before you begin viewing homes. When you find the perfect property, this qualification letter may give you a competitive advantage over other buyers because it shows sellers you're serious and ready to move forward. A preapproval also helps you to understand what you may qualify for based on your creditworthiness, debt-to-income ratio (DTI) and other factors.

Learn more: How Long Does a Mortgage Preapproval Letter Last?

4. Find a Real Estate Agent and Mortgage Lender

It's a good idea to enlist the expertise of a reputable real estate agent, especially since the seller usually covers their commission. An experienced agent can help you find homes that match your preferences, set up viewings and handle negotiations on your behalf.

Similarly, a mortgage lender or independent broker can help you explore your loan options whether you're planning to use the home strictly as a vacation property or a rental. They can also help you decide how you want to finance the home, whether it be through a conventional loan or a home equity option. Keep in mind, you can't finance a vacation home through government-backed mortgages like Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans.

5. Choose a House

Once you find the perfect vacation home, it's time to make a competitive offer. If the seller accepts your offer, you'll likely need to make a good faith deposit—typically 1% to 3% of the offer price—to demonstrate your commitment to the deal. From there, your lender or mortgage broker will help you formally apply for the loan and work through the steps to get approved.

6. Get Insurance

You'll need to line up homeowners insurance early in the process, as lenders typically require it before they'll approve your loan. Your policy should cover the full loan amount, but you may also need extra protection for floods, earthquakes or other risks if the home is in a high-risk area.

Tip: If your home will sit vacant for long periods, ask your insurer if their standard homeowners policy covers a vacant home, as many don't. You may need to buy unoccupied home insurance to stay protected during those times.

7. Finalize and Close the Deal

Finalizing the mortgage on your vacation home works much like it did with your primary home. Before closing day, review your loan documents carefully to make sure the final terms match what you've agreed to. You'll also need to transfer your down payment and closing costs. At the closing meeting, you'll confirm everything is in order, sign the paperwork and officially take ownership of the property. Once you have the keys, you can start moving in, setting up utilities and getting your vacation home ready to enjoy.

Learn more: What to Know About Buying a Second Home

Borrower Requirements for a Vacation Home

Qualifying for a vacation home mortgage is similar to a standard mortgage, although it can be tougher to qualify. Here's a breakdown of the requirements you'll need to meet:

• Debt-to-income ratio: Along with your credit score, lenders like to see a low DTI ratio, as it shows you keep debts low relative to your income. As a general rule, your total monthly debt should represent 43% or less of your monthly gross income, but the lower, the better.
• Credit score: The minimum credit score required to qualify for a conforming loan on a second home is 640. However, if your down payment is less than 25%, you'll need a score of at least 680 or 720 depending on your DTI ratio.
• Down payment: While many standard mortgages can be secured with a down payment as low as 3%, you'll likely need at least 10% down to obtain a vacation home mortgage. Your lender may even insist on a down payment of 20% or higher if your credit score and DTI are less than ideal.
• Cash reserves: Lenders also want to know that you can weather a rough financial stretch without falling behind on your loan payments. Ideally, you should have two months of cash reserves or six months or more if your other qualifications are below the lender's requirements.

If you're weaker in one category, like a high DTI, you may still qualify if you're strong in others. For example, if your DTI is high, you could potentially make up for it with a bigger down payment or extra cash reserves.

Learn more: How to Build Credit to Buy a House

Property Requirements for a Vacation Home

In addition to meeting specific requirements as a borrower, your vacation property must also meet a few requirements to show it's truly a vacation home, not an investment property.

• Must be single-unit dwelling: Lenders only approve vacation home loans for properties with one living unit, such as a single-family home, condominium or townhome. That's because multi-unit properties are generally considered investments, which come with stricter requirements.
• Must be owner-occupied for part of the year: As a vacation home, you'll need to use the property yourself for portions of the year to qualify for a mortgage. Requirements vary by lender, but some may expect you to stay in the second home at least 14 days a year or 10% of the time it's rented out, whichever is greater.
• Suitable for year-round occupancy: Even if you only plan on using the vacation home during the summer or winter season, the home should remain livable year-round, with basic utilities turned on and the property accessible.
• Can't be someone else's full-time home: Since a rental home is considered an investment property, someone else can't live in the home full time if you want it to qualify as a vacation home. Along the same lines, the home can't be run by a property management company or operated under a shared ownership agreement as part of a timeshare.

Alternatives to a Vacation Home Mortgage

If you don't qualify for a vacation home mortgage or simply prefer a different route, consider these alternative options.

• Pay in full: If you have the means, you may consider buying the second home outright rather than financing it. You'll be able to use the home as you wish, with no lender restrictions, and you may have more negotiating leverage with the seller to lower the purchase price or close faster.
• Partnership or co-ownership: A vacation home may be more affordable if you share the purchase cost and maintenance responsibilities with a trusted partner or family member.
• Borrow from home equity: If you have enough equity in your home, you may be able to take out a home equity loan or line of credit and use the funds to buy your dream vacation property. For example, you could borrow against your primary home to cover the down payment or even pay for the home in full. Another home equity option is a cash-out refinance, which lets you replace your current mortgage with a new, larger one and gives you the difference in cash. You can then use that money to purchase a vacation home.
• Construction loan: If you can't find the right property for your vacation home, you may be able to build one using a construction loan. These loans cover the cost of land, permits, materials and labor.

Tip: A construction-to-permanent loan may help you save on closing costs by rolling your construction loan into a standard mortgage once the home is built. Instead of applying for a second loan after construction, it converts automatically into a regular mortgage with one loan and one closing.

Learn more: Should You Tap Into Your Home Equity?

Frequently Asked Questions

The Bottom Line

A vacation home can provide you with your own private getaway without the hassle of booking a hotel. Before you get too far along in the process, review your finances to make sure you meet the eligibility requirements to qualify for a mortgage for a vacation home.

It's also a good idea to shore up your credit profile before you apply for a new mortgage. A higher credit score could improve your odds of qualifying and receiving favorable terms. Check your credit report for free with Experian and consider signing up for free credit monitoring for personalized tips you could use to improve your credit.