6 Must-Know Tips for Financing a Vacation Rental Home

Financing a quality investment in an amazing vacation rental home property can make you incredibly rich (if you do it right). For both first-time investors, and those just now getting into the game, having some solid tips on how to finance intelligently is incredibly useful. With that in mind, here are six must-know tips for financing a vacation rental home in 2023:

1. Keep Your Financing Intentions Clear

Lenders will inquire about your intended use when you ask them to finance your vacation home. With a traditional loan, you can typically get a better mortgage interest rate. Depending on how frequently you intend to use the property and how far it is from your principal house, you may or may not be granted that. If you’re like the majority of vacation home purchasers, you’ll decide to use your property to generate rental income. Lenders will view it as an investment property if you intend to rent it out full-time with little to no personal use. Compared to second houses, investment properties have different mortgage rate alternatives. Be truthful and consider using a high-quality vacation rental loan lender to achieve your goals. How you intend to use the property should be understood by both you and your lender.

2. Remember the Nature of Underwriting

Checking your eligibility is the first step in obtaining finance for a vacation home. This entails donning your banker’s cap and looking objectively, and critically, at your financial situation. Check your credit score first. Higher credit scores are preferred by lenders for vacation properties. The minimum FICO credit score required by Fannie Mae, for instance, is 640 for vacation homes with a 25% down payment. That’s 10% more than what it requires as a minimum credit score for a primary house with the same 25% down payment. The following consideration is your monetary reserves. Ideally, lenders would like to see six months’ worth of cash set aside, although they might be lenient for highly qualified salary earners.

3. Local Banks are More Flexible

Eat, drink, and bank locally as well! In addition to being the neighborly thing to do, choosing a local bank is a smart move if you want to maximize the benefits of your vacation rental loan. Practically speaking, smaller banks occasionally provide you with better loan terms and lower rates than big banks or online lenders. Using a neighborhood bank may be more cost-effective for you, but it also benefits your community and your vacation rental company! Investing money locally boosts the local economy and improves the region, which benefits your vacation rental.

4. Take Advantage of Your Home Equity

Home equity lines of credit (HELOC) and cash-out refinancing are two often used home equity options for purchasing a vacation house. The primary distinction between the two is that, while a HELOC is a line of credit backed by home equity, a cash-out refinance loan allows you to refinance your original mortgage into a larger mortgage while also allowing you to withdraw the difference in cash. Both choices have advantages and disadvantages. For instance, you might be able to lock in a reduced mortgage rate with a cash-out refinance while still making only one payment. With a HELOC, you can access a revolving line of credit secured by your equity, but you usually have to accept a variable interest rate.

5. Go In On a Loan with Friends

Consider entering the property with friends or family if the numbers start to look alarming. Your financial obligations could be cut in half if you shared the costs with someone. If you want to follow this path, make sure that all agreements are documented in writing and approved. During particular holidays, who is permitted to use the vacation home? Payments will be handled by whom? A person’s carelessness could result in ruptured pipes that both individuals would have to pay for.

6. Stay Confident with Your Borrowing

A vacation property can be owned without being a millionaire. To begin, you’ll want to find a home contractor that can work with your unique budget, and vacation home goals. Will they permit you to convert your traditional loan into a HELOC, for instance, so that you can withdraw money to pay for renovations that will boost the rental Return on the property? More attainable than most people realize, owning your first vacation property can be a life-altering event. There are options for financing; all you need to do to secure one is to be aware of them so that you may go with confidence from lender shopping to closing.