A vacation home is a residential property purchased for personal use away from your primary residence. It could be a beach house, ski condo, cabin in the mountains, apartment in the city or other qualifying property.
For mortgage purposes, a vacation home is typically classified as a second home. If you want to see what home loan options might be available to you, you can reach out to a Newrez mortgage expert. They’ll be able to help you explore your options so you can make an informed decision.
Click to navigate:
- How to Get a Mortgage for Your Vacation Home
- Vacation Home Financing Options
- Insurance Considerations
- Pros and Cons of Buying a Vacation Home
- FAQs
How to Get a Mortgage for Your Vacation Home
To be able to qualify for this type of loan, you’ll need to:
- Purchase a home that’s suitable for year-round occupancy
- Purchase a home that’s in a location where it can reasonably function as a second home
- Occupy it for some part of the year
- Have exclusive control over the property
- Keep the property available for personal use more than half the calendar year
Here are some of the steps you’ll need to take to move forward with getting a mortgage for a second home.
Step 1: Estimate the Full Cost of Ownership
The mortgage payment is only part of the total cost of owning a vacation home. You should also plan for:
- Property taxes
- Homeowners insurance
- HOA fees or condo dues
- Utilities
- Routine maintenance
- Emergency repairs
On top of that, homes in vacation destinations may face harsher weather or require specialized insurance. A beach property may need flood and wind coverage. A mountain home may need snow removal and weatherization. You may also want to invest in home security systems for the times the home will be empty.
Step 2: Review Down Payment Requirements
Vacation homes usually require a larger down payment than primary residences. A second home typically requires at least 10% down, although the amount can vary depending on your credit profile, the loan amount, the property type and lender requirements.
Step 3: Have Your Financials Ready for Review
Lenders will review your full financial profile, including:
- Credit score
- Debt-to-income (DTI) ratio
- Income stability
- Current mortgage payment
- Proposed vacation home payment
- Down payment funds
- Cash reserves
- Occupancy plan
One potential challenge is the DTI ratio, since lenders evaluate whether your income can support both your primary and vacation home payments.
Cash reserves also matter. Lenders sometimes require you to have enough funds left after closing to cover several months of payments.
Step 4: Get Preapproved*
A mortgage preapproval can help define your budget before you start shopping for a vacation home. During preapproval, be prepared to show documentation of your income, assets, and debts.
Vacation Home Financing Options
There are several financing options that may help you purchase a second home, depending on your budget, goals, and current financial situation.
Fixed Rate Mortgage
A fixed-rate mortgage has an interest rate that stays the same for the entire loan term. Because the rate doesn't change, your principal and interest payment remains predictable from month to month.
This option may be a good fit if you want the certainty of a consistent monthly payment and plan to keep the home for the long term.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage offers a lower initial rate for a set period. You’ll be able to get a lower rate to start with, but that can lead to higher rates later, depending on what market rates look like in the future.
An ARM may make sense if you expect to sell or refinance before the first adjustment period ends, but you should estimate the future payment and test its affordability before choosing this option.
Home Equity Loan**
A home equity loan lets you borrow against equity in your primary residence. You could use the funds for a down payment or a cash purchase.
This can be useful if you have strong equity and want a fixed repayment schedule. The risk is that your primary home secures the loan, so make sure you can pay it back.
Cash-Out Refinance***
A cash-out refinance replaces an existing mortgage with a larger new mortgage and provides the difference in cash, based on the eligible equity in your home.
This money can be used to fund a vacation home, but it can be costly if your current mortgage has a low rate. You should compare the total cost before refinancing.
Insurance Considerations
Vacation home insurance may be more expensive than standard homeowners insurance1, especially in areas where there’s a higher risk of floods, hurricanes, wildfires or earthquakes.2
A vacation home may need:
- Homeowners insurance
- Flood insurance
- Windstorm insurance
- Hurricane coverage
- Earthquake insurance
- Umbrella liability coverage
- Condo loss assessment coverage
Before making an offer, you should request insurance quotes, as those can affect affordability. You’ll also want to know how much taxes, maintenance and any other applicable fees cost, as those can add up quickly.
You should also review HOA and condo rules (if applicable) to see what coverage, if any, they may require.
Pros and Cons of Buying a Vacation Home
Pros
A vacation home can offer personal enjoyment, long-term growth potential and lifestyle flexibility. Some buyers may also purchase a vacation home with the goal of using it as their future retirement home.
Cons
The costs of a vacation home can add up quickly. You’ll need to be able to make mortgage payments and cover the cost of insurance, taxes and maintenance. Managing a property from a distance may also bring additional costs.
Frequently Asked Questions
Yes, you can get a mortgage for your vacation home. Other ways to finance your vacation home include taking out a home equity loan or cash-out refinance to help pay for your purchase.
No. FHA loans are intended for primary residences, not vacation homes.
No. VA loans are intended for eligible borrowers purchasing or refinancing a primary residence, not a vacation home.
A second home usually requires at least 10% down.
