Vacation home mortgage loan options

Understand your mortgage loan options when you’re thinking about buying a vacation home.


Even if you’re planning to pay cash for your vacation home, it can be interesting to reconsider financing instead. Financing may allow you to buy multiple vacation homes now or in the very near future. This would allow you to diversify your portfolio and increase your revenue potential. It can also give you a little more freedom to use your favorite vacation property more, knowing that your other short-term rentals are open for more reservations.

So, whether this is your first or your fifth vacation home, it’s a good idea to go through a couple of different loan scenarios with your lender. There are several levers to pull, so you can make the most informed and rewarding investment—or multiple investments.

Types of vacation home mortgage loans

According to our research, nearly three-quarters of people planning on buying a vacation home expect to use some form of financing to purchase their vacation home.* Whether they’re planning to rent or hold for personal use, the majority of today’s buyers are budgeting in a relatively modest range, with 64% planning to pay under $399k.*

Here’s what the loan landscape looks like:

Conventional or fixed-rate mortgage

Most existing home loans 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% when certain conditions are met.

Adjustable rate mortgage (ARM)

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 loan 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.

Jumbo loan (non-conforming loan)

A conventional 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 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%-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.

Bridge loan (gap loan)

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.

What about an FHA loan?

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.

With a home that earns short-term rental income, it’s possible to offset your mortgage, taxes, and homeowner’s association (HOA) fees. This income may allow you to break even on your vacation home. In time, your vacation rental can become profitable. You can also leverage future equity into another real estate (or lifestyle) investment. And, as the home appreciates in value, you’ll have equity to leverage into another vacation rental.

Your option to “swap” vacation homes with a 1031 exchange

If you already own a vacation rental, 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.

Remember, it can be advantageous to work with a lender who has financed vacation home buyers before. Contact us if you’d like a referral—we’re here for you!

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*Source: 2019 Vacasa Vacation Rental Buyers 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.