Owning your own personal vacation home is a wonderful way to give yourself an exclusive sanctuary. No reservations required; you can simply drive (or fly) to your property and enjoy a nice weekend getaway. Or, with today’s mobile technology, even a month-long escape!
It sounds like a dream, but it can be a reality. However, there are some important factors that you need to consider before purchasing your vacation home.
Buying a Vacation Home or Second Property: 6 Important Considerations
1. Your Income, Debt Load, Credit, and other Factors Will Be Treated Differently
One of the most important things to understand about loans for vacation and second properties is that your income, as well as your debt load, will be treated with more scrutiny. This heightened analysis results from two important factors: the fact that vacation homes are an addition cost, and the fact that second properties have more risk to lenders.
A mortgage on a vacation home is an additional expense. For most people, the mortgage on the primary home is their only real-estate-based debt cost. However, if you have a mortgage on a vacation home, this cost is in addition to your primary mortgage, which makes qualifying for a mortgage more difficult, but certainly not impossible.
As for risk, think about it this way: if you have a mortgage on your personal home where your family lives, as well as a mortgage on your luxury vacation property, which one would you let go into foreclosure in the event of a financial emergency? For obvious reasons, almost everyone would let their vacation home go while protecting their family home. For this reason, lenders know that they need to be more cautious when delivering loans on vacation properties.
2. Is This a Spot You Absolutely Love?
Renting a cabin or beach house for a single week is convenient, fast, and affordable. Best of all, if you get bored with the location, you don’t have to travel there next year.
With a vacation house, however, you are taking a big step; it’s not absolutely permanent (you can alway sell), but it’s as close to permanent as it comes. With that in mind, you must be totally certain that this is the right vacation spot for you and your family. You don’t want to go through the hassle of purchasing a vacation home only to discover that this area, or the house itself, is not right for you.
3. Opportunity for Income
Another consideration that you should mull over is the chance to earn an income off of your vacation property. Depending on the nature of your property, as well as the local laws, you may be able to rent out the property (on a short or long-term basis) and earn additional income from the purchase.
This income could be a useful asset when you are applying for the loan. In some cases, you may even be able to structure the purchase as an investment, then use the future rent checks as income towards your loan application. This process can be slightly complex, and not all properties nor borrowers will qualify, but it’s worth discussing with a lending agent to see if structuring the purchase as an investment would be useful.
4. Taxes on a Vacation Home Can be Complicated
The taxes on your vacation home can change depending on a wide variety of factors. It can be classified as a personal residence or a rental property while still falling under the umbrella of a “vacation home,” at least according to the IRS. If you are limiting rental times to two weeks a year or less, it will qualify as a personal residence. (Not a primary residence, however. This is an important distinction.) If you rent the property more than 14 days a year, it is considered a rental property in the eyes of the Internal Revenue Service.
If the vacation home is classified as a rental (more than two weeks of renting), you will not be able to claim the mortgage interest as a tax deduction. But you will have the opportunity to claim losses on the property if the amount of loss is more than the rental income.
It’s also important to remember that you can only deduct interest paid on mortgages up to $750,000 on all of your homes. This can all be complex, so talk with a tax professional to fully understand the best way to structure your property.
Note: We are not tax experts and do not give tax advice. The above content is for general information only and may not reflect current tax laws or tax laws in your area. Speak with a qualified expert to understand the tax implications of purchasing a second home or vacation property.
5. Some Loans are Unavailable for Second Properties and Vacation Homes
Some people are fortunate enough to purchase their vacation home without a loan. But for most, financing is required; even if someone can afford the purchase, they may choose to use a loan and not lock their money into real estate.
Either way, there is financing available for vacation homes and second properties. One of the most popular options is a conventional loan, which can be used to purchase a second property. However, these loans do have limits, so if your desired vacation property has a purchase price of, say, $1 million, you will likely need a jumbo loan.
Government-backed loans, such as USDA, VA, and FHA loans, are not available for vacation properties.
6. Local Laws May Limit Renting
We discussed renting out your vacation home, but one important consideration is the fact that state and local laws could make it difficult, if not entirely impossible, to rent out your vacation home. Basically, you can’t count on this as a certainty until you verify with the local governments. Even if you can rent it, laws are always changing so you need to be aware that renting out the property could be halted.
Find a Top-Quality Loan for Your Vacation Home or Second Property
If you are looking for an affordable loan that helps you purchase a gorgeous vacation home or a comfortable second home, contact our staff today. With a wide range of experience and access to a vast assortment of financing options, we can help you choose the right product for your specific needs!