How to Buy a Vacation Home: 7 Tips

a vacation home can be a good source of rental income

Purchasing a second house is now more enticing for those who can afford it, with working remotely becoming standard for many individuals during the epidemic. Why not do business from the location where you enjoy going on vacation or where you would prefer to reside?

If you’ve got a favored getaway location that you go to frequently even if you don’t work from home, a vacation house may be at the top of your wish list. It’s preferable to cramped hotel accommodation or consistently worrying about rental costs.

Whether you’re thinking of buying a vacation home today or in the future, here are some measures you can take to ensure that the process goes more smoothly.

7 Tips for Buying a Vacation Home

A house purchase in a new-area involves careful planning and consideration, just like any other home purchase. Here are some tips for buying a vacation home.

1. Think about what you will do with a vacation home

A vacation home might serve as your main dwelling if you don’t already have a place of your own. If the purchase price isn’t more than the typical loan limit in your location, you may be eligible for a home mortgage and benefit from homeowner tax advantages.

You can also utilize the house as a second home, but a lender will probably require a down payment of a minimum of 10 to 15 percent. Even so, you’ll receive the same tax benefits as if the house were your principal residence.

If you intend to rent out the vacation house while it’s not in use to assist with the monthly mortgage payment, it can also be used as an investment property. However, the deposit will be significantly larger and the interest rate on the loan will be greater.

2. Decide on the location carefully

Although it may seem obvious, you must be able to explain why you specifically want a second house before you begin looking. The response ought to direct your search. For instance, according to the NAR, 87% of vacation home buyers in 2013 intended to use the property mainly as a getaway with their families. As a result, the typical home was 180 miles away from the buyers’ principal residence.

If the primary goal of the house is for you and your family to get together and enjoy it as a family, you’ll want it to be in a location that is both accessible for everyone and has a wide range of activities for all age groups.

Twenty-five percent of buyers intend to rent the property out to others, therefore you may want to choose a location where there are multiple rental seasons so you aren’t restricted to revenue for, say, four months a year. 

using a vacation home as a primary residence is another option for vacation homeowners

3. Check how much you can afford to invest

It’s crucial to be aware of potential expenditures before making a second-home acquisition.

There are costs for principal, interest, taxes, and insurance if there is a mortgage (PITI). Whether you pay for them personally or with money from rental revenue, owning a holiday home comes with additional costs in addition to the monthly mortgage payments. These costs often consist of:

  • Management and open positions (if you rent)
  • Household items and furniture
  • Servicing and repairing

Owners of vacation properties may wish to think about short-term nightly rentals through services like Airbnb, FlipKey, or HomeToGo in addition to in-season renting through a nearby real estate broker to offset costs.

The IRS states that there may be restrictions on the rental expenditures you can write off if you rent out a home that you also use as your residence. If you occupy a housing unit for personal use for more than the larger of either 14 days or 10% of the total days you lease it to others at a reasonable rental rate during the tax year, the dwelling unit is regarded as your primary residence.

A second home’s very nature, however, might also result in additional expenses. Who will maintain the property if, for instance, you live 150 miles away? Who is responsible for inspecting the property after a storm?

If you’re considering purchasing real estate near a beach or in a forest, research the availability and price of insurance before making a purchase. Without the necessary insurance coverage, you cannot obtain or maintain a mortgage, so ensure it is both available and reasonably priced.

4. Research Local Lending services

It’s recommended to seek a lender in the neighborhood where the home is situated who has expertise in second homes. The lender will be able to quickly finance your purchase and will be familiar with the local laws and regulations.

For example, where your vacation home is located affects how you finance. A second house poses a greater risk to lenders than a primary property since, in the event of a downturn, debtors are more likely to keep up with their primary residence payments. In order to mitigate that risk, purchasing a second house often entails paying more cash up front, having enough money to finance two properties, and paying higher interest rates.

a vacation property near the sea is an excellent vacation rental option

If the house is going to be rented out, things get much more difficult. Lenders start to question whether they are funding a second property or an investment property once rent enters the picture. The distinction is significant since it is simpler to meet the requirements for second home loans.

When unrelated parties purchase the property together, it becomes more complicated since the lender wishes to ensure that there won’t be disputes among the owners that lower the value of the property. The best strategy is to hire an attorney to draft a written contract outlining the ownership and management of the property.

The list of difficulties continues on, but the key idea is this: If you’re seeking to purchase a vacation property, a knowledgeable lender with local expertise on credit mortgage will be your greatest option.

5. Decide How You Will Finance Your Vacation Home

Consider your financing alternatives after you’ve located a lender. You could be thinking of using your savings, a cash-out refinancing from your primary house, or a Home Equity Line of Credit (HELOC) to make the down payment. The best idea is to save since you won’t accrue more debt.

When financing a permanent property, lenders may be more lenient in some respects than when financing a vacation home. For example, FHA and VA loans are not an option because they are only meant for main residences. However, conventional finance is possible. 

A second home is what Freddie Mac characterizes as:

  • The borrower must reside there for a certain period of the year.
  • The property must only be under the borrower’s control.
  • A timeshare cannot be a second home.
  • It has to be a single-family home.
  • It must be habitable throughout the year.
  • There cannot be any contracts involving the property that give a property manager authority over how the property is used.
  • The borrower cannot be qualified using rental income.

vacation home purchase can be your first step into the rental market

6. Compare Mortgage Rates

Mortgage rates for second homes are generally between 0.5 and 1 percent higher than those for first homes. Make sure to look around to discover the best terms and prices for a second mortgage.

7. Consult a Local Realtor

Working with a knowledgeable local real estate agent is essential whether buying property in a new place or even one you’ve visited frequently for vacation. They will be aware of the properties that are available as well as any local limits or rules, as well as the reasons you would favor one property over another.

Loan Requirements for Vacation Homes

Down payment 

In general, you can put as little as 3% down when buying your main house. You’ll need at least 10% for a vacation house.


Occasionally, you may be able to purchase a primary house with little to no reserves. You’ll probably need reserves equivalent to two to six months’ worth of mortgage payments for a vacation house.

Debt-to-income (DTI) ratio 

For a principal home, borrowers may be able to get finance with a DTI of 50%. Aim for around 43% or a little bit more for a vacation home.

Credit score

If you have a 500 credit score and a 10% down payment, you can use an FHA loan to purchase the main house. You’ll want a minimum credit score of 640 to purchase a vacation home, for which FHA loans are not accessible.

A lot of lenders have tightened their approval standards as a result of the financial crisis. Be careful to examine the requirements for vacation home mortgages with various lenders.

a vacation home is always a better option than cramped hotel rooms

Benefits of Vacation Real Estate Investments

Compared to long-term rentals, purchasing a vacation home offers tax benefits, the opportunity for property growth, increased rental income, excellent meeting spaces, and the flexibility to remodel or decorate at any time. Here are some of the benefits of investing in vacation homes.

Property Appreciation

Simply, appreciation takes into account how much the asset will be valued when the owners decide whether to refinance or sell it in the future. It is quite simple to predict a small appreciation rate using historical data. In actuality, the income from short-term rentals, which normally last a few weeks to a few months, exceeds that of long-term rentals, which often last for more than a year.

Homes in well-located sites rent out better as holiday getaways than a family’s primary residence in big tourist areas such as Miami, Lake Tahoe, New York, and San Diego. When you do the figures for your market, you’ll see it is clear that having a furnished vacation home in a desirable location is a sensible investment.

Tax Benefits

Depending on where the residence is located, the tax component might change dramatically. The IRS website has detailed information on everything from property devaluation to tax benefits for clergy and the military for Americans purchasing real estate in the United States.

There are several exemptions that allow for the tax deduction of things like loan repayments and even visits to rental properties. It’s crucial for consumers making international purchases to be aware of the tax laws in both their native country and the location of the property.

vacation rentals are a great way to make passive income in short-term rental market

Cash Flow

By leasing out their vacation rental investment home on Airbnb, owners can make an average of over $900 per month while also qualifying for hefty tax incentives.

Being a short-term landlord is sometimes less profitable than investing in holiday rentals because you can change listing prices in response to changing market conditions and seasonal demand. Additionally, you will not be dealing with troublesome renters or the inconveniences associated with late bills and evictions!

You can reduce costly vacancies by using effective marketing methods and a knack for selecting the best location.

Down payments and mortgage rates

There are several things you need to understand before submitting a mortgage application. But obtaining a mortgage is not as difficult as people imagine. Those with high credit scores and those who intend to dwell in their houses all year round pay the lowest interest rates on mortgage loans. These owners frequently accept down payments of as little as 5% of the asking price.

When an investment property can be bought even when another person is residing there, the down payment is often around 20-30%, and the rates are frequently 2-3% more than those for primary residences.

Given this, many individuals who have resided in their primary property for more than a year believe that it would be financially advantageous to purchase a new home at a cheaper price and rent out their current one temporarily. In any case, if you do the math correctly, purchasing a second house outright might still result in excellent profits.

vacation homeowners can benefit from tax breaks on their vacation property taxes

It’s Never Been Easier To Purchase A Vacation Property.

The Mortgage Shop is the one-stop shop for acquiring advantageous loans on holiday homes, short-term rentals, and long-term rentals thanks to the over 15 years of expertise behind our loan staff.

If you want to buy a vacation home, we’re here to support you every step of the way. We’re far more than your typical lender; we’re a group committed to your success and the accumulation of riches for future generations.

We are committed to providing outstanding service that is specifically catered to your needs since we believe that your entrepreneurship is a strength, not a burden.

You’ve finally discovered your financing solution if you’ve been searching for a mortgage loan provider who comprehends the realm of real estate investments and short-term rental investing, All it takes is one click to turn your fantasies into reality!