As the Metro DC real estate market heats up, DC homeowners are becoming interested in buying vacation homes while prices are still reasonable and mortgage rates are low. The idea of owning a private retreat near the coast, or having a warm-climate getaway for the winter months certainly holds appeal!
Vacation Home Financing Strategies
Of course, vacation homes in prime locations can have a hefty price tag. Strategies for financing your vacation home usually fall into a few categories:
- Cash purchase
- Home equity loan against primary residence
- Mortgage
- Retirement funds
As a rule of thumb, even if you can purchase a vacation home with cash, it may make more sense to keep your money for other investments and purposes, and use a low-rate mortgage to facilitate your purchase. Why tie up your cash if you don’t have to? Ditto for using retirement funds. You could borrow against them; but liquidating your retirement funds for a vacation home purchase may not be the best choice.
Mortgage Guidelines for Second Homes
Mortgage financing for vacation homes is a bit tougher than it used to be, but in many cases it’s the best option for buying your piece of paradise. The main issue to bear in mind is that lenders make a sharp distinction between a vacation home for your personal use, vs. a rental property that someone else is occupying for the bulk of the year. Here are the basic guidelines for financing a second home:
1. Your second home must be a reasonable distance from your primary residence. However, if your primary residence is nearby, a second home that includes water rights or other deeded recreational amenities should satisfy the lender.
2. Your second home cannot be used as a rental property. Your vacation home must be for your own use. Otherwise the lender will consider it an investment property, which has different lending guidelines.
3. Your second home cannot be left vacant. You must occupy it for at least a portion of the year. Seasonal use is fine, and so is weekend occupancy.
4. Time-share properties are not eligible for second home financing.
5. Your second home must be a single family unit, such as a condo or single-family home. No duplexes or multi-family homes would be eligible, even if you occupied one of the units on a seasonal basis. The lender would view these as rental properties.
6. You must have a significant down payment – usually 20% or more – and you must have a healthy credit score, considered by most lenders to be 720 and above.
Some lenders have been using jumbo mortgages to accomplish second home financing, but this is usually employed in areas where the median home value exceeds standard underwriting guidelines.
The Estridge Group is Here to Help!
If you are dreaming of owning a vacation home, stop dreaming and start planning! As your DC area real estate experts, we have a vast network of trusted professionals around the country. We can refer you to reputable mortgage lenders, and help you with your vacation home search!
Ready to get started? Contact us today!
Melinda Estridge
The Estridge Group-Long & Foster Real Estate, Inc.
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