How to buy a vacation home 2023
There may be a few extra steps to buying your holiday home
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Owning a vacation home sounds dreamy — a place to create cherished memories, immerse yourself in nature and enjoy a break from everyday life.
However, the path to buying a vacation home can present a few more challenges than buying a primary residence. Factors like location, maintenance costs and the potential for limited use can complicate the process.
- Consider factors such as location, property management options, rental potential, maintenance expenses and future resale value.
- Financing a vacation home may require higher qualifications and a larger down payment than a primary residence.
- Before buying a vacation home, thoroughly evaluate the legalities and tax implications.
Finding a vacation home
In some ways, shopping for a vacation home is similar to shopping for any other home. But there are also key differences to consider, especially if you’re planning to rent it out as an investment property.
The first thing you need to do, of course, is identify your ideal location. Consider things like:
- Local attractions and amenities
- The region’s climate
- Accessibility from your primary home
- The overall appeal of the area
- Local laws and taxes
If you’re planning to rent out the property, you’ll also want to consider the area’s average rental rates, current demand, future growth potential and local rental laws.
How to search for a property
There are many ways to look for vacation properties. If you frequent the area and can be there in person, take a walk around to see what’s up for sale or lease. Ask through word-of-mouth what might be coming up on the market. You can also check real estate websites specializing in vacation homes. Some of these sites have search tools for filtering vacation rentals versus properties for sale.
It’s a good idea to work with a local real estate agent who knows the area and can provide guidance on available properties. Local real estate agents will know the market and property values, plus they should be able to provide insight into the rental potential if you plan to rent it out.
A local real estate agent can also help you navigate any legal or regulatory considerations specific to vacation homes.
» MORE: Homebuying checklist
Paying for the vacation home
Just like with buying any home, paying for a vacation home typically involves a combination of saving and financing.
Set a budget and create a savings plan for the down payment and ongoing expenses. This may involve setting aside a portion of your income specifically for this purpose.
If you have assets, like investments or other properties, you may consider selling or using them to generate the necessary funds. For example, you may be able to leverage your primary residence by using a cash-out refinance or getting a second mortgage on it.
You can also explore financing options like a mortgage. But if you choose to finance your vacation home, carefully evaluate its impact on your overall budget. Also, remember there may be different mortgage requirements if the property is located in the U.S. versus in a different country.
- Mortgages for domestic vacation homes
- Applying for a mortgage for a vacation home in the U.S. isn’t much different from what it takes for a standard mortgage. However, “there are some extra qualifications needed and costs associated,” said Shelby McDaniels, the national director of business development at JPMorgan Chase.
“Financing a second home adds additional financial pressure to a homeowner,” said McDaniels. “Lenders want to ensure a borrower’s ability to repay the loan.”
To do this, lenders often require you “to have higher credit scores, lower debt-to-income (DTI) ratios, a larger down payment and extra funds in reserve.”
With a second home purchase, McDaniels explains that you may need a credit score of 620 or greater. Plus, she says getting approved is easier if you have a DTI ratio below 43%, and you may need a down payment of at least 10%.
- Mortgages for foreign vacation homes
- When purchasing property abroad, you have two options for obtaining a mortgage including:
- Using a lender in the country where the property is located
- Seeking financing from a lender in your home country specializing in international mortgages
If you work with a local lender in a foreign country, you’ll need to meet its requirements and application process. This may involve providing documentation like proof of income, credit history and details about the property. The local lender will assess your eligibility and determine the loan terms, interest rates and repayment conditions based on its criteria.
Alternatively, there is a small handful of U.S. lenders that offer mortgages for purchasing property abroad, such as HSBC International and Kredium. These lenders have experience in navigating the complexities of international real estate transactions. The terms and conditions of the mortgage will depend on the lender's policies and the specific details of your application.
In either case, it's essential to consider factors such as exchange rates, local laws and regulations when obtaining a mortgage for a foreign property. Working with professionals like real estate agents and mortgage brokers familiar with international transactions can provide valuable guidance.
Buying the vacation home
Buying a vacation home is similar to purchasing a primary residence, but there are a few extra steps and considerations.
- Make an offer: Contact the seller or their agent and make an offer on the property. Negotiate such things as the price and terms and conditions of the sale, keeping in mind any unique factors related to vacation homes, like rental potential or seasonal availability.
- Conduct inspections: Just like with buying a primary residence, it's important to assess the condition of the vacation home before finalizing the sale. Use a home inspector to thoroughly examine the property and identify any issues that need to be addressed.
- Review property management options: If you plan to rent out your vacation home when you're not using it, explore property management options in the area. Research local companies or individual property managers who can handle rental bookings, maintenance and guest interactions.
- Review homeowners association (HOA) rules: If the vacation home is in a community or development with a homeowners association, carefully review the HOA rules and regulations. Understand any fees, restrictions on renting and specific requirements that may apply to your property.
- Purchase homeowners insurance: Contact insurance companies to obtain quotes for homeowners insurance coverage for your vacation home. (If you’re buying abroad, you may need to find a local insurer in that country.) Make sure to consider the property's location, potential risks and any specific insurance requirements for vacation homes in the area.
- Coordinate financing: If you need financing, work with your lender to finalize the mortgage process for your vacation home. Be aware that interest rates or loan terms may differ from those for a primary residence.
- Close the sale: Once any contingencies have been satisfied, you can proceed with closing on the home. Review and sign all the required documents.
- Transfer utilities and services: Arrange for the transfer of utilities, such as electricity, water and gas, to your name before you take possession of the property. If desired, set up any additional services, like internet or cable television.
- Furnishing and maintenance: Decide how you want to furnish and maintain your new vacation home. Consider whether you will handle cleaning and maintenance tasks or hire a property management company to assist you.
- Enjoy your vacation home: Once you've taken possession of the property, it's time to enjoy it! Make memories, relax and take advantage of the benefits of owning a vacation property.
Remember to consult with professionals, such as real estate agents, tax advisors and financial advisors, to ensure you have a comprehensive understanding of local regulations, tax implications and any legal or financial implications involved in buying a vacation home.
What to consider before buying a vacation home
Before buying a vacation home, there are several factors you'll want to consider. For example, you’ll need to consider the financial implications of owning and maintaining two properties. Plus, you’ll need to think about how buying the home might affect your taxes and long-term financial plans.
Keep in mind that owning a second property entails additional expenses, such as property taxes, insurance, maintenance costs, utilities and possibly association fees. Ensure you have a clear understanding of the financial commitment required and whether it fits within your budget.
Location and accessibility
Choose a vacation home in a desirable location that suits your preferences. Consider factors like proximity to attractions, transportation options and the ease of access to the property from your primary residence.
Legalities and regulations
If you're buying a vacation home in another country or jurisdiction, familiarize yourself with the local laws and regulations regarding property ownership by nonresidents. Understand the legal requirements, tax implications and any property use or rental restrictions.
Maintenance and management
How will you manage the property's maintenance and upkeep? Consider the costs and logistics of hiring a property manager or caretaker to handle routine maintenance, repairs and emergencies. If you intend to rent out your vacation home, a good property manager can handle tasks like marketing and guest communication.
Research the rules, fees and services provided if the vacation home is part of a managed community or resort. Understand the benefits and drawbacks of such arrangements, including potential restrictions on property modifications and the impact on property value.
If you plan to rent out your vacation home, research local occupancy rates, seasonal fluctuations and check for restrictions on short-term rentals.
Rental potential and ROI
If you plan to rent a vacation home when you're not using it, evaluate its rental potential and the local rental market. Research occupancy rates, seasonal fluctuations and attractiveness to renters. Calculate the potential return on investment (ROI) to determine if renting it out is financially viable.
Also, check if there are local laws or restrictions on short-term rentals. This includes evaluating any potential licensing requirements, taxes and homeowner association rules.
Personal usage and flexibility
Consider how often and for what purposes you'll use the vacation home. Determine if it aligns with your vacation plans and lifestyle. Assess whether you are willing to limit your usage or be flexible with rental availability if you plan to generate income through rentals.
Long-term plans and future resale value
Evaluate your long-term plans for the vacation home, such as selling the property in the future or using it as a retirement home. Even if you plan to keep the vacation home for an extended period, it's wise to consider its future resale value. Look for locations with potential for appreciation over time.
Consult with a tax advisor to understand the tax implications of owning a vacation home, both in your primary country of residence and the location of the vacation home. Tax laws can vary, and it's essential to consider any potential tax obligations, deductions or benefits. For example, tax rules vary based on whether you live in the home for more or less than 14 days a year.
Can you have two primary residences?
For tax purposes, you can only have one primary residence, which the IRS refers to as your main home. However, you may be able to deduct mortgage interest on both your main home and a second home.
Even if you consider a home your primary or secondary residence, the IRS doesn’t allow you to deduct mortgage interest if the loan proceeds weren’t used to buy your home, build it or make substantial improvements.
Are vacation homes tax-deductible?
Possibly. The IRS allows you to consider a home (or dwelling unit) a residence if the number of days you personally use it during the year is greater of:
- 14 days; or
- If rented to others at a fair rental rate, 10% of the total days it was rented during the year.
If your vacation home qualifies as a residence, you may be able to deduct the real estate taxes and mortgage interest you pay on the property.
Is it hard to finance a vacation home?
While it’s not hard to finance a vacation home, you may need to be slightly better qualified to get a mortgage on a vacation home than what’s required for a primary residence. Some mortgages for a primary residence allow small down payments of 3% or even no down payment at all. To finance a vacation home, you might need to make a down payment of 10% to 20%.
Plus, you might need to have a better credit score or DTI ratio to qualify for a loan on a vacation home, as lenders may consider these types of loans riskier (for example, if you lose your job, you’re more likely to default on the loan for your vacation home versus your main home).
- Article sources
- ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- IRS, "Publication 936 - Home Mortgage Interest Deduction." Accessed June 19, 2023.
- IRS, “Frequently Asked Questions - Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses) 5.” Accessed June 19, 2023.
- IRS, "Topic No. 415, Renting Residential and Vacation Property." Accessed June 19, 2023.
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