Looking to buy a luxurious vacation home in the San Diego area?
You’re not the only one! There’s a reason so many people choose San Diego’s luxurious yet affordable neighborhoods as the ideal spot for their dream vacation property.
But to make that dream your reality, you need to learn how to get a mortgage on your vacation home.
It might be tempting to start by spending hours looking at gorgeous houses on the market. But before you let yourself go there, it’s important that you have a game plan.
So in this article, we’ll walk you through the 5 crucial steps to get a mortgage on your vacation home.
Ready to make your dream come true?
1. Make sure you meet the requirements to buy a vacation home.
You don’t need to be swimming in cash, but you should know that the standards for qualifying for a vacation home are higher than for a primary residence.
Buying a vacation home means adding a second mortgage to your budget. So lenders want to make sure you can handle the extra debt.
A Down Payment: For a vacation house, you’ll likely need to put down at least 10% as a down payment. Of course, this is higher than the 5% minimum down payment for a conventional loan on a primary home. But thankfully, it’s a little lower than the typical 15% down payment for investment properties.
Cash Reserves: You also need to make sure you have at least 2 months’ worth of cash reserves. Lenders want to know that, in case of an emergency, you have something to fall back on.
Your Credit Score: Lenders are looking for a higher credit score when it comes to vacation properties. So make sure your score is around 720 or higher. (If your credit score is lower, expect your minimum down payment to increase.)
Your Income: Lastly, lenders are looking at your income—and specifically your debt-to-income (DTI) ratio—to make sure you can afford a second residence. The higher your DTI, the higher your down payment will need to be.
2. Create a sustainable budget.
As I mentioned before, buying a second home means adding an extra mortgage to your monthly budget. Keep in mind that’ll also include home insurance, property taxes, and any HOA fees.
Not only that, but you’ll also need to pay for the monthly costs of maintaining a second home. That might include any water or electricity consumed (even by caretakers when you’re not there) as well as the cost of maintaining the grounds, keeping the property secure, and caring for any pets or animals you keep there.
3. Decide how you will finance the vacation home.
Now we’re getting to the big decisions of getting a mortgage on your vacation home. So what does that process look like? Most people choose the conventional route:
Get a conventional loan.
This is the most common option, and we’ve already discussed some of the requirements for pursuing it.
To go this route, you need to make sure you—not a property management company—will exclusively own and control the vacation home.
You need to live in the home for at least a portion of the year, and it needs to be available and suitable for year-round use. (You also can’t use rental income to qualify for the loan.)
The problem some people run into is how to get money for their down payment.
If that’s an obstacle for you, you might want to…
Take out a home equity loan.
When you take out a home equity loan, you use your primary residence as collateral for a lump sum of money to put toward your down payment on your vacation house. The higher the appraised value of your primary home, the higher your loan can be.
You could also take out a home equity line of credit (HELOC). This is similar to a home equity loan, but instead of a lump sum, you simply draw money as needed from a source of funds.
Neither of these is options to take lightly. After all, if you can’t pay off your loan, your lender may be able to force you to sell your primary residence so you can fulfill your financial obligation.
Get a cash-out to refinance on your current house.
In this case, you’re taking out a new mortgage that’s bigger than your current one. The new mortgage pays off your former mortgage, and then you receive the difference in cash.
That difference can go toward your down payment.
Go in with someone (or multiple people).
If you’re comfortable sharing the vacation home with other friends or family members, this is a great way to save on costs.
In situations like this, it’s smart to hire an attorney who can make sure the details of the arrangement between you and your co-borrowers are clear and written down. Even with family, this is a wise step to take. Sadly, you never what disagreements or issues can arise.
4. Find a local lender.
Local lenders often offer lower rates than national lenders do. Plus, local lenders know the area well and have insider knowledge to help guide you on the journey of getting a second mortgage.
Whenever a buyer hires Team Foote, we always point them to a few of our favorite local lenders so they can find the perfect fit!
5. Hire a local real estate agent.
We put this step last—but not because it’s the least important. Hardly!
Finding an excellent local real estate expert can help you avoid hefty fees, unnecessary paperwork stress, and all-around bad deals. (Some sellers are good at hiding flaws in their homes! We protect our clients by sniffing those out.)
At Jessica Foote & Associates, we treat each of our clients as real people with unique needs and goals—because they are! And you are, too.
If you’re looking to purchase a vacation home in the San Diego area, our team would be proud to help you.
Click here to set up a time to talk about your vacation home dreams!