Five tips for financing a vacation home

How to get and keep your credit-worthiness before buying a vacation home


As you search for the right vacation home, it’s important to get and keep your finances in order. Take time to consult with your expert vacation home real estate agent, a financial advisor, and your preferred mortgage lender. Every home buyer’s financial situation is different, and you want to have the information and insights you need to put your best financial foot forward during your vacation rental real estate deal.

The don’ts

1. Don’t make any large purchases when you’re close to buying

Avoid making any unusually large purchases or doing anything that negatively impacts your credit in the four- to six-month run-up to buying a vacation home.

Banks will be scouring your accounts to ensure they can trust you with a loan. If you make a big purchase (like a car, a boat, or the payment for a wedding) or miss even one small payment, you could negatively impact your loan amount and interest rate.

2. Don't quit your day job

When you’re buying a vacation home, it may not be the best time to retire or call it quits with your current employer. Stick around until the closing paperwork is signed, if you can help it. Lenders qualify you for your loan terms based on many factors, including your debt-to-income ratio. So, if you’re suddenly unemployed—even if it’s an early retirement—a lender may penalize you or choose to withhold financing.

The do’s

3. Do get your credit in line

Keep your credit in good standing, or tighten it up a bit.

  • Keep paying your bills on time
  • Avoid opening new credit lines
  • Avoid closing any credit account
  • Check your credit at Equifax, Transunion, and Experian
  • Resolve any errors or discrepancies on your credit report

When you’re buying a vacation home, your pre-approval and final loan terms can be negatively affected by bad credit or pesky, erroneous credit errors. The better your credit score, the better your interest rate. You may want to run your reports at all three credit reporting agencies: it’s not uncommon to find different information on each site.

4. Do prepare your vacation home down payment

Most lenders and loan types will require you to pay some percentage of your loan amount as a down payment. If your assets aren’t already liquid, it may be time to shift your down payment funds to cash. Remember, if you aren’t putting at least 20% down, lenders will require you to have mortgage insurance (MI or PMI), which will add to your monthly mortgage payment.

If you’re getting some cash from family or friends to help you buy a vacation home, gifted money can be used to help with down payments. But, most lenders will require a formal gift letter. Make sure you have the paperwork you need to meet your lender’s requirements.

5. Do plan for closing costs

Closing costs are expensive and can catch vacation home buyers by surprise. These costs include your lender’s fees, such as application and origination fees, appraiser fees, underwriting fees, and their costs for running your credit report. Frequently, your closing costs will also include your mortgage insurance premium, annual property tax payment, title search fees, and more. Other fees may be included, depending on the laws in your city, county, and state.

In our experience, when you’re buying a vacation home, you can expect to pay closing costs between 2% and 5% of a home’s purchase price. So, if your home costs $400,000, you might pay between $8,000 and $20,000 in closing costs.

To make sure you’re prepared for closing costs, talk to your vacation rental real estate agent and your lender to align on what your closing costs entail, how much they can run, and what you can do to lower them. Your lender is required by law to provide you with your closing disclosure at least three business days before closing.

If you’re taking these financing tips into account, that’s exciting—it means you’re getting close to your goal of buying a vacation home. Congratulations!

Learn more: Do you need to sell another investment property to buy your next vacation rental? Here are five things to know about 1031 exchanges for vacation homes.

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*This document is for information and illustrative purposes only. It is not intended to provide “investment advice” or a “recommendation” regarding a course of action. The discussion is general in nature and has not taken into account your personal financial position or objectives. You should consult a licensed financial advisor or other professional to discuss your specific situation.