Guide to Financing a Vacation Rental
Rental properties for vacation purposes have become more and more popular especially in the last few years as more travelers are looking for comfortable accommodations that allow more freedom in the way they vacation. With this, there are more interested people looking to purchase vacation rental properties in hopes to diversify their income.
One question some potential buyers have when getting into the vacation market is, “how can I obtain a mortgage for a current vacation rental property?”
In general, it can be more difficult to obtain a mortgage for an investment property. In addition to the common challenges one may expect to face in obtaining financing for any property purchase, the travel industry is seen as riskier.
Here are some tips for getting a vacation home financed
Try to think as the underwriter would
A first step to financing a vacation property is determining if you would be eligible to qualify. Before contacting a lender try putting on a banker’s thinking cap and give yourself an honest critical assessment of your current financial situation. Do things like check out your credit score. Often when financing vacation properties lenders want to see higher credit scores than traditional conventional loans call for. The average requirement for a loan that Fannie Mae would back is a FICO credit score of 640 with a 25% down payment.
They also want to consider how much cash reserves you have. These are funds set aside in your savings account that could help cover bills for the vacation property and your primary home if you happen to lose your job. For vacation properties, many lenders want to see at least six months of cash reserves but this can be flexible for borrowers with higher income.
Figure out your debt-to-income ratio
This is commonly abbreviated as DTI in the mortgage world and is calculated by dividing the total monthly debt by gross monthly income. This takes into account everything from your tax responsibilities to your car payments and mortgage as well as other items like credit card debt.
It is one of the most current tools used by lenders to estimate a borrower’s ability to pay back a loan by getting a good picture of how much free income the borrower has to use on what they wish. For a vacation home, lending most lenders want to see a DTI at 43% or lower.
Communicate a clear plan
In financing an investment property including vacation rentals those lending you money will want to know your plans for the property. They do not want to lend out money to something that does not have a solid business model. You want to make sure you communicate clear and precise plans for this property and how you plan to ensure it is profitable.
Find a mortgage that borrows for the right usage
The way in which you utilize this vacation property will influence the options available to you for financing. For vacation properties that you plan to solely rent out for the purpose of income, it is best to research investment property loans. This may require more information given when applying but will give you the best loan product for your purchase.
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