According to our research, nearly three-quarters of people planning on buying a vacation home expect to use either cash or a conventional loan.* But that’s not where your options end—the vacation rental industry is growing so quickly that some lenders are creating new vacation rental loan products.
Whether this is your first vacation home or your fifth, it’s a good idea to go through a couple of different loan scenarios with your vacation rental lender. There are several levers to pull, so you can make the most informed and rewarding investment. We’ll help start you off on the right foot—here’s our guide to the major vacation rental mortgage loan options.
Most existing home loans, like those for a primary residence, are conventional or fixed-rate mortgages. These loans are immune to mortgage rate changes that can occur over the lifespan of the loan, meaning the interest rate will not change (unless you refinance later).
Fixed-rate loans are packaged 10-, 15-, 20-, and 30-year products. The most common is a 30-year loan. Vacation home down payment options may be flexible, and there may not be a need to put 20% down. In fact, in our experience, some vacation home or vacation rental buyers can put as little as 10% down when certain conditions are met.
There are various types of ARM home loans, and the basic idea is that the initial interest rate for the first three, five, or seven years of the loan is locked in. Then, once that initial loan period ends, the ARM adjusts to the current rate. That new, adjusted (and usually higher) rate is what you pay every year after.
If you plan to pay off your ARM during the initial three-, five-, or seven-year term, this could be an interesting product for you. Or, if you’re planning on buying and selling your vacation home before your initial loan period ends, it could be a very attractive option. If you own your vacation home longer than the initial loan period, you will be subject to the market rate fluctuation, which can cause your vacation property mortgage rates to go up or down each year.
A conventional loan or ARM jumbo loan may be available if you want to finance a vacation home and the home has a dollar value that exceeds conforming loan limits. (Conforming loan limits are set by Fannie Mae and Freddie Mac, two financial organizations chartered by the U.S. Congress to help keep the mortgage industry stable and affordable.)
Because jumbo loans have higher rates than conforming mortgage loans, underwriters consider them a non-conforming loan and they can be a riskier loan to offer. However, if you have a larger income, a higher credit score, a lower debt-to-income ratio, and at least 6–12 months’ worth of cash reserves, a mortgage lender may offer you a fixed-rate or adjustable-rate jumbo mortgage.
To be eligible for a jumbo loan, you may also need to make a down payment that’s between 10% and 20% of your vacation home’s sale price. Depending on your state or your lender, the rates may be higher or lower than a conforming mortgage rate.
If you are trying to buy and sell a vacation home at the same time, the bridge loan (also called a gap loan) can be an excellent option for a smooth transition. This loan lets you combine your existing home mortgage and new mortgage loan into one. Once you sell one home, you pay off your initial mortgage and refinance on the remaining amount for your new vacation home.
To qualify for a bridge loan, you must have excellent credit and a low debt-to-income (DTI) ratio. You also need to be in a position where you don't need to finance more than 80% of both vacation rentals’ combined value.
Remember, it can be advantageous to work with a vacation rental mortgage lender who has financed vacation home buyers before. Contact us if you’d like a referral—we’re here for you.
Yes. If you already own a vacation rental property, and you want to sell it and trade up, consider a 1031 exchange. Put simply, a 1031 exchange is IRS-speak for swapping one income property for another. It’s a unique tax benefit—with some specific requirements—that’s becoming more common in real estate deals as property owners increasingly look to trade up for vacation homes.
Federal Housing Administration (FHA) loan options are not available for vacation homes or vacation rentals. They are currently restricted to primary residences.
That said, if you haven’t yet purchased your first home, look again at your other loan options and begin to explore them with a lender. A vacation home may very well be within reach.
If you’re planning to use some form of financing to pay for your vacation home, you’ll first want to see if you qualify for a second mortgage. The criteria lenders will potentially look at include your debt-to-income ratio (DTI), your credit score, and your cash reserves. Luckily, we’ve got a guide to walk you through it—read it here.
A 650 or above is considered a good credit score, but if you want to put less money down, you’ll want to score even higher (like 680 or above). The higher your score, the more likely you’ll be to qualify for a loan—and pay lower interest rates.
First off, take a look at your financing options, including a Home Equity Line of Credit, a cash-out refinancing for your primary residence, an investment property loan, or a conventional loan. After you identify the type of loan you want, you’ll want to find a lender who offers it, and work with the loan officer to explore your options further.
(Tip: It can be really beneficial to work with a lender who specializes in second homes—since financing a vacation home requires a slightly different approach than financing a primary home.)
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*Source: 2021 Vacasa Vacation Rental Buyer Report. Download here.
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.