Financing a Vacation Home vs. an Investment Property

		Financing a Vacation Home vs. an Investment Property

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Tuesday, August 04, 2020
Financing a Vacation Home vs. an Investment Property

One of the variables lenders refer to when evaluating a loan application is the occupancy of the property. Lenders know that someone who is facing some negative financial issues and also owns multiple properties, the last property to face a possible foreclosure is the owner’s primary residence. Owners in financial duress will attempt to sell non-occupied homes first or allow them to go into foreclosure before a primary residence. They have to have somewhere to live, right? In that light, lenders provide slightly lower interest rates for a primary residence compared to an investment property. But what about a vacation home? Vacation homes are occupied by the owners at different times during the year but still maintain their primary residence as their home. Are there any differences between financing a vacation home compared to an investment property?

There are distinctions and rates and terms can be different as it relates to the two types of homes. Lenders can consider a vacation home less likely to be let go compared to a rental. However, there is a definition as to what constitutes a vacation home instead of just a rental property. Lenders can offer slightly better rates for a vacation home compared to a rental property and lower down payment requirements. But what qualifies a property as a vacation home and not a rental? Many who own vacation homes often rent the home out when they’re not living in the vacation home. In a lender’s eyes, there are ways to determine if the property is a vacation home and not a rental.

The primary requirement is the property needs to be occupied by the owners for 30 or more days out of the year. The home should also be a single family home and cannot be a duplex or 2-4 unit property and the property must be suitable in which to live year-round. Think for example a cabin in the mountains where it gets heavy snowfall in the winter making it difficult to access the cabin. How would a lender know if a prospective property will qualify as a vacation home instead of a rental? Simply put, the prospective buyers let the lender know of their intentions. They do so by checking a box on the loan application. On the application, there are three options in which to check: Primary Residence, Secondary Residence and Investment. It’s the secondary residence that qualifies as a vacation home.

On the other hand, an investment property will typically command a down payment of 20% or more. Interest rates for an investment property compared to a vacation home can be anywhere from 0.25% to 0.50% higher. That means higher rates and more cash needed at the settlement table. As it relates to qualifying for an investment property, it should be noted that the rental income from the unit can’t be used to help qualify for the purchase if the property is a first time investment. With subsequent purchases of rental properties, the income generated can be used to help qualify. Vacation homes may also be rented out at times during the year but the income from the rentals cannot be used to help qualify.

There are some tax implications as it relates to non-owner occupied properties so you should discuss a potential purchase with your tax advisor. The IRS for example designates the property as an investment if you plan to live in the home more than 14 days out of the year or more than 10% of the time it’s rented out. I know it’s kind of “getting into the weeds” when parsing an investment vs. a vacation home, but the status does matter.

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