How to finance your dream vacation home

Ever since the first stay-at-home orders of 2020, who among us hasn’t felt the urge to spread out—and into a vacation home? From luxe waterfront condos to cozy cabins in the woods, COVID-19 helped inspire a collective dream to get away from it all, to the proverbial home away from home.

Lately, many people have been turning those daydreams into reality. Across the U.S., vacation home sales jumped 16% in 2020, nearly tripling the overall growth rate in existing-home sales, according to a National Association of Realtors report. And demand for second homes showed no signs of abating through 2021, with vacation property sales rising by 57.2% year-over-year from January through April of this year.

If you’re thinking of joining the growing ranks of vacation-home-owners, read on for some tips to help you along the way.

Five key steps on the path to vacation home ownership

Following are key considerations as you navigate the vacation home buying process.

1. Map out your budget

Some of the costs associated with buying a vacation home mirror those associated with your primary home, like new furniture expenses as well as monthly mortgage payments.

However, buyers should know that down payment and homeowners insurance typically cost more for a second home than for a primary residence. For starters, that’s because lenders assume more risk on loans for second homes. Plus there may be fewer, more expensive coverage options for a property that’s off the beaten path. And if you’re planning to rent out the home occasionally as a short-term vacation rental, you’ll need specialty coverage as well.

Maintenance and repairs issues also pose unique challenges in vacation properties. At home, you’re around enough to know what maintenance is needed, and when. But when you’re only at your vacation home every once in a while, it’s harder to keep up with basics like keeping the gutters clear, or addressing unpredictable disruptions like severe weather or burglary. Be sure to factor in maintenance costs like hiring a property management company for regular service.

2. Consider how comfortable you are with virtual shopping

The rising trend toward remote work is enabling people to consider vacation homes even further afoot than ever. Fortunately for folks looking well beyond their usual stomping grounds, many real estate agents learned to support clients remotely during the height of the pandemic.

If you’re likely to conduct your real estate search primarily or entirely from a distance, then be sure to enlist a buyer’s agent with strong local knowledge. The right person will be able to bring you, via video chat, to a virtual walk-through—and provide insights the screen can’t show, like noisy neighboring dogs, traffic noise or musty smells.

Of course, there are some risks in buying a property sight-unseen. Be sure to ask your agent about contract law in the state where you’re searching. While the fine points vary, most states allow the opportunity for a buyer to back out of an accepted offer.

3. Be prepared for a bidding war

Given historically low inventory and the fact that all-cash offers are on the rise, it’s wise to prepare yourself for the possibility of a bidding war. In addition to having a reputable real estate agent on your side, it’s also important to have a trusted mortgage loan officer in your court who can help you secure a loan within your budget.

4. Understand the implications of short-term vacation rentals

The IRS and lenders both have strict requirements that help distinguish second homes from investment properties. Primarily these restrictions concern how much time you plan to stay there yourself, versus renting it out as a short-term vacation rental. Be sure to ask your lender about this and other possible requirements early in the process.  

5. Shop for a mortgage that meets your unique needs

A conventional mortgage can cover vacation homes, but don’t expect one from the Federal Housing Authority (FHA) or Veterans Administration—they generally only cover primary residences. Also bear in mind that in general, mortgage lenders take on more risk when lending for vacation homes than they do for primary residences—and the numbers reflect that. For the most part you can expect a higher down payment and you’ll also likely need to show lower debt-to-income ratio, higher credit scores and more reserves.

Is a vacation home in your future? Find out how much home you can afford by filling out an online mortgage calculator. From there, you can proceed toward your dream with a better understanding of what it will take to make your vision a reality.