The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for .
- You can get a loan for vacation homes, such as a fixed-rate conventional loan or home equity line of credit, from a private lender, but there are no government-backed loans for vacation homes.
- Qualifying for a vacation home loan is typically harder than it is for a primary property, with higher debt-to-income ratio, credit score and down payment requirements.
- A local lender can help you navigate local regulations and find the best vacation home insurance for your property.
Buying a second home is a big step but comes with personal and financial rewards. Owning a vacation home beats staying in a tiny hotel room and spares the hassle of making reservations or worrying about the cost of rental rates. And over the long term, a vacation home can help you build wealth as the home appreciates.
Whether you’re considering taking out a loan for a vacation home now or it’s still on your wish list for the future, there are steps that can make financing a vacation home more seamless.
How to get a mortgage for a vacation home
Just because you’re buying a vacation home does not mean you don’t have options. There are a few different types of home mortgages you can get for a vacation home.
A conventional loan comes from a private lender instead of from the government. This is typically a fixed-rate mortgage on vacation homes, which locks in a certain mortgage rate for a specific term of up to 30 years. You might also be able to get an adjustable-rate mortgage (ARM) on vacation homes, which only locks in your interest rate for a set initial period, usually between five and 10 years. After that, it changes to the current market rate.
If you have equity in your current property, you may have the option of either a home equity loan or a home equity line of credit (HELOC). This uses your ownership stake as collateral for your loan or line of credit. You could also opt for a cash-out refinance, which turns your existing mortgage into a new, larger mortgage and lets you borrow your home equity in cash.
Vacation home loan requirements
Before you can be approved for a vacation home loan, you need to meet a few requirements:
- Debt-to-income ratio: Borrowers can sometimes finance with a 50 percent debt-to-income ratio (DTI) for a primary residence. For a vacation property, DTI can be up to 45 percent.
- Credit score: Lenders tend to look for a higher credit score when financing vacation home properties. You will likely need a credit score of at least 660 for a vacation home loan, compared to the 620 typically required for primary residence mortgages.
- Down payment: Lenders typically require at least a 10 percent down payment on vacation homes, while primary residences may only require 3 percent down.
- Reserves: In some cases, you can buy a primary residence with little or no reserves. For a vacation home, you’ll likely need reserves equal to two to six monthly mortgage payments.
How to buy a vacation home in 8 steps
As with any home purchase, buying a new vacation home requires serious thought and preparation. Consider these factors before you buy.
Step 1: Decide how you’ll use the vacation home
If you don’t yet own a home, you can use the vacation home as your primary residence. You could qualify for a home loan with just 3 percent down, assuming the purchase price isn’t greater than the conforming loan limit in your area, and take advantage of homeowner tax benefits.
You can use the property as your second home, but you’ll likely need at least 10 to 15 percent down to secure a loan. Another option is to use the vacation home as an investment property if you plan to rent it out when it’s not occupied.
However, if you’re primarily using it as an investment property (rough rule of thumb: you’ll live there for less than 14 days annually), you’ll pay more in interest on the loan, and the down payment will be much higher.
Step 2: Determine what you can afford
Before you decide to take out a mortgage on a vacation home, it’s important to understand the costs you might face and determine if a second home is in your budget.
In addition to your monthly mortgage payment, you’ll pay other expenses associated with vacation property ownership. These expenses generally include:
- Maintenance and repairs
- Furniture and housewares
- Management and vacancies (if you rent)
Step 3: Find out about vacation home insurance
If you’re planning to get a loan for a vacation home, your mortgage lender might require that you purchase a vacation home insurance plan. These costs vary depending on the property’s type and location. For example, a beachside home can be riskier due to the potential for hurricanes and flooding, so premiums will likely be higher than homes more inland.
Look into the availability and cost of insurance before you decide to buy a vacation home, and factor it into your budget.
Step 4: Seek out a local lender
It’s best to look for an experienced mortgage lender specializing in second homes in the area where you want to buy, if possible. A local lender who finances vacation homes will have sources of financing ready and understand the required rules and specifics for the area where you are buying.
Step 5: Decide how to finance your vacation home
Once you find a lender, explore your options for financing a vacation home. While lenders can be liberal in some ways when financing a primary residence, it’s different when financing vacation homes. Using funds from your savings is often the best option, if possible, because you won’t tack on additional debt.
Step 6. Ensure you meet vacation home loan requirements
Even if your vacation home is going to be mainly a home and not an investment property, financing is often a little more rigorous than for a primary home.
There are certain requirements you will need to meet to be approved for a vacation home loan. For example, according to Freddie Mac, a second home must meet the following criteria:
- It must be a single-unit dwelling.
- It cannot be a timeshare.
- It must be suitable for year-round occupancy.
- The borrower must occupy it for some portion of the year.
- The borrower must have exclusive control over the property.
- The property cannot be subject to any agreements that give a management firm control over the occupancy of the property.
- Rental income cannot be used to qualify the borrower.
Step 7: Compare vacation home mortgage rates
Vacation home mortgage rates are typically higher than financing for a primary residence — about 0.5 percent to 1 percent extra. Be sure to search for the best second home mortgage rates and terms.
Step 8: Work with a local realtor
Buying real estate in a new area — or even one you’ve vacationed in for many years — requires expert guidance, so be sure to work with an experienced local real estate professional. They will know not only what properties are available but also why you might prefer one to another, and any local regulations or restrictions.
Vacation home FAQ
A vacation home can be a valuable asset that allows you to build wealth over time and can even provide a passive stream of income. However, first, you must ensure that your budget can comfortably afford the mortgage payment and the additional upkeep expenses. Read up on other important considerations before buying a second home to inform your decision.
You will need at least enough money to cover the down payment, which could be anywhere from 3 to 20 percent in total. It’s also important to have several months of cash reserves saved to cover vacation home expenses should you experience an unexpected loss of income.
Depending on how you use your vacation home, it may ultimately be very similar to a second home in the eyes of the IRS. A second home is considered a home that you maintain in addition to your primary residence. You must occupy it for more than 14 days a year or an amount of time that’s equivalent to 10 percent of the days you rent it out.
If you use a vacation home similarly, occupying it for more than 14 days a year or 10 percent of the days you rent it out, it, too, is considered a second home.