Are you dreaming of owning a vacation home but worried about having to put down 20% for the down payment? Well, the good news is that it’s possible to put down less than 20% on a vacation home. However, there are certain things you need to know before making any decisions.
What is a vacation home?
A vacation home, as the name suggests, is a second property that you own primarily for recreational purposes. It’s different from your primary residence, which is your main home where you live year-round. A vacation home can be located anywhere and can be used by the owner or rented out to others when not in use.
Why do lenders require a 20% down payment?
When buying a primary residence, lenders generally require a minimum down payment of 3% to 5%, depending on the type of loan. However, when it comes to buying a vacation home, the requirements are usually more stringent. Lenders typically require a larger down payment for second homes because they pose a higher risk.
Since vacation homes are not occupied year-round, they’re more likely to be damaged or vandalized. Additionally, if you default on your mortgage payments, lenders will have two properties to go after instead of just one.
Can you put less than 20% down on a vacation home?
Yes, it’s possible to put down less than 20% on a vacation home. Some lenders offer programs that allow borrowers to put as little as 10% down. However, keep in mind that these programs usually come with stricter underwriting requirements.
To qualify for these programs, you’ll need to have good credit (usually at least 700), a low debt-to-income ratio (usually no more than 43%), and enough cash reserves (usually at least six months’ worth of mortgage payments).
What are the pros and cons of putting less than 20% down?
The main advantage of putting down less than 20% is that you’ll have more cash on hand for other expenses, such as furnishings or renovations. Additionally, if you’re planning to rent out your vacation home, a lower down payment can help improve your cash flow.
However, there are also some drawbacks to consider. First, you’ll have a higher monthly mortgage payment because you’re borrowing more money.
Second, you’ll likely have to pay for private mortgage insurance (PMI) until you’ve built up enough equity in the home to reach the 20% threshold. PMI can add hundreds of dollars to your monthly payment.
What are some alternatives to putting less than 20% down?
If you’re not comfortable putting down less than 20%, there are some alternatives to consider:
- Wait and save up more money for a larger down payment
- Borrow against the equity in your primary residence
- Consider a co-investment program where an investor contributes funds in exchange for a share of the property’s rental income and appreciation
The bottom line
Buying a vacation home can be an exciting prospect, but it’s important to carefully weigh your options and understand the risks involved. While it’s possible to put down less than 20%, it’s important to remember that this comes with its own set of challenges. Make sure to speak with a lender and financial advisor before making any decisions.