New lending rule makes owning vacation property easier

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If you’re considering buying a second home, now could be a great time to it. Here’s why:

• The rise of sites like Airbnb now makes it easier to receive occasional rental income. This practice is even allowed by most lenders. However, rental income can’t be used to qualify for the loan.
• If you’re planning to periodically rent out your second home, your property can still qualify as a “second home” rather than an “investment property,” even if rental income is detected.
• Second home mortgage rates are lower than those for rental investment properties.

Now could be the best time to buy a second home

According to the National Association of Realtors, vacation home sales remained at their second highest level since 2006.

The median second home sales price isn’t showing any signs of weakening either. At $192,000, vacation property prices are up 28 percent from 2014.

Whether you’re trying to buy a second home as an investment, a special getaway, or a place to retire, owning a vacation spot can be a rewarding endeavor.

And, thanks to updated lending rules that let you rent it out part-time, owning a second home may not be as spendy as you think.

But it’s not a decision to enter lightly, either. Examine the potential challenges and rewards, then decide your next steps toward owning a permanent vacation spot.

First things first: Decide if owning is right for you

Buying a second home shouldn’t be an impulse buy. Weigh benefits and costs.

Calculate insurance expense, for one. Some of the most desirable resort communities are at risk for hurricanes, floods or forest fires.

Request multiple insurance quotes on the home to make sure monthly costs are within your budget.

Maintenance expenses should also factor in. Two percent of the home’s value per year is a good rule of thumb for up-keep.

Another consideration when buying a second home is that, in addition to the down payment, second homes may require cash reserves. In simple terms, reserves are the funds you have left over after purchasing a home.

The lender may require you to show between two and six months of payments in a checking, savings, or investment account. For instance, if the second home payment including taxes, insurance, and HOA dues is $2,000, the lender will require you to show a minimum of $4,000 in your accounts.

You don’t have to turn the money over to the lender; you just need to show you have it.

When figuring the costs, it can be a good idea to inflate the numbers. It is better to figure a higher number than you’ll need, to be safe.

Fall is the time to buy a second home

According to some experts, the ideal time to purchase a second home is in the off season.

As the hot seller’s market is cooling down, many owners may be willing to negotiate. Particularly for homes on the water, sellers often take less than they would during spring or summer months.

Fall can be an opportune time for negotiating. Home sellers may fear that by not selling now, they may have to wait until next spring.

Each month the seller holds the property costs money. The current owner may take a lower price to avoid holding a vacant property until next year.

Buying in the off season also gives buyers time to make any necessary repairs so that the home is ready to enjoy during the summer months.

New lending rule: Defray second home cost with rental income

For some, owning a vacation home may sound like something reserved for the rich and famous, but that’s not necessarily true.

Owning a second home may not be as expensive as it first appears. The reason: potential rental income.

Some homeowners defray their monthly mortgage expense by renting out their vacation home when they’re not using it.

The rise of Airbnb and similar services now make it easier to receive occasional rental income.

This practice is even allowed by most lenders. Fannie Mae, the agency that creates rules for the majority of the nation’s loans, updated their stance recently.

While rental income can’t be used to qualify for the loan, Fannie Mae now says that lenders can consider a property a “second home” instead of an “investment property” even if rental income is detected.

This is important.

Second home mortgage rates are lower than those for rental and investment properties. And, down payment requirements are more lenient. The rule may not come into play when you buy, but most certainly will if you want to refinance in the future.

Make sure the property meets all second home requirements to avoid paying higher rates now and on a refinance later.

To be an eligible second / vacation home, the property:

• Must be occupied by the owner some portion of the year
• Is a one-unit home (not a duplex, triplex, or four-plex)
• Is suitable for year-round use
• Belongs solely to the buyer
• Is not rented full-time, and is not under a timeshare arrangement
• Is not operated by a management firm that has control over occupancy

In addition, the home must be a reasonable distance away from the buyer’s primary residence. It also helps if the house is in a resort community or area.

In short, the property must “feel” like a recreational residence, not a rental property posing as one.

Second home down payments

Many buyers, even if they can handle the monthly payment, don’t think they can come up with the “large” down payment for a second home.

For qualified borrowers, though, most lenders require just 10% down.

That down payment can even come in the form of a financial gift.

Those putting less than 20% down will pay mortgage insurance. But that cost is relatively cheap.

According to mortgage insurance provider MGIC, a well-qualified buyer with ten percent down on a $250,000 vacation home will pay just $100 per month in mortgage insurance.

Second home interest rates are low too. Rates are actually the same as they are for a primary residence purchase. In today’s mortgage rate market, you could get a 30-year fixed vacation home loan in the mid-3s.

What are today’s vacation home mortgage rates?

Mortgage rates continue to defy the odds at all-time lows, but who knows for how long? With low rates and a cooling seller’s market, now could be the best time to buy that vacation home.

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