Many homeowners have familiarity with the mortgage process, including applying for an FHA loan, because they used it to buy their current homes. However, buying a vacation house is different. Property purchases that will not function as a primary residence often have unique mortgage requirements. This is especially true if the buyer still has a mortgage on their existing homes. By gaining a greater understanding of the unique aspects of vacation homes, buyers will be better prepared to go through the process.
What Can Buyers Expect When Applying for a Vacation Home Mortgage?
Applying for a mortgage to buy a vacation home may not be significantly different than for a primary residence. The unique effect is in the requirements. Lenders and government-backed lending programs tend to give priority to people buying a home to live in most of the year. This means that buying a second home tends to have stricter limitations, which may include:
- higher minimum credit scores
- greater monthly income
- down payment of at least 10 percent, as much as 20-30
- months of assets in reserve (2-12 months, depending on loan)
The specific requirements will differ depending on the lender and the borrower’s financial details.
Why Do Vacation Homes Have Different Mortgage Requirements?
The biggest reason lenders tend to set higher requirements for a second home is risk. People who live in the home as a primary residence are less likely to default on the loan, because they need a place to live. Vacation home buyers who have an existing mortgage on their current homes may struggle to make the payments on two mortgages at once. This is why mortgages on second homes typically have higher interest rates. The increased risk depends on the borrower’s credit profile and their other debts. Someone who has excellent credit, low debts, and has already paid off the mortgage on their current home may receive very similar terms on a vacation home compared to a loan to buy a primary residence.
Does Rental Income Count for Vacation Homes?
As a general rule, rental income does not count for a vacation home. People who plan to rent out a property most of the year and only occupy it on occasion, if at all, are typically buying an investment property. Buying a home for investment may have different requirements compared to buying a second home. Regardless, lenders often look skeptically at rental income because it is hard to guarantee. Home buyers can usually only count this as income on an application if they have an existing tenant and a current contract, which is unusual. Tomball home buyers should talk to their lender and research the limitations on using a vacation home as a rental property before they apply.
Are There Unique Tax Implications for Vacation Homes?
In advance of buying a vacation home, buyers ought to consider the unique tax implications for property that does not serve as a primary residence. Currently, homeowners are allowed to deduct mortgage interest paid on loans up to $750,000. This includes second homes, as long as homeowners meet specific requirements that exclude investment properties. If a person’s loans for their primary and secondary homes exceed this number, they can only claim a portion as a deduction.
The rules on capital gains are more distinct. Homeowners can generally exclude up to $500,000 in capital gains on their taxes when they sell a primary residence. This usually does not apply to a vacation property, unless it was recently their primary home. Homeowners who plan to buy a second home and eventually sell it should prepare for the increased tax liability.
The application process for a vacation home may be identical to buying a home for primary living, except for a few higher requirements. By considering the differences concerning getting a mortgage for a vacation home, buyers can ensure that they are ready.