Expect stricter mortgage requirements
More than 60% of vacation-home buyers carry a mortgage (current national average rate: 3.5% on a 30-year fixed-rate loan). If you plan to get one, be prepared for more scrutiny from lenders than on primary residences.
“These loans tend to have higher credit requirements because people are taking on large amounts of additional debt,” says David Gorman, Regional Sales Executive for Bank of America. “Traditionally, they are more likely to pay the mortgage on their primary homes if they run into financial issues.”
Those higher credit requirements come primarily in the form of higher down payments. Expect to put down at least 10% on a vacation home (compared with a 5% minimum, or even no down payment, for a primary residence). You may want to put down 20% or more, if you can, to avoid paying private mortgage insurance (PMI), which usually runs between 1/2 and 1% of the loan amount on an annual basis.
You’ll qualify for the best mortgage rate if your credit score is over 700. Otherwise, you could pay a rate that’s about 1% or more higher.
Know the cost of insurance
You’ll, of course, need homeowner’s insurance and you may have to buy flood or earthquake insurance (that costs $650 and $800 a year, on average, respectively).
According to the Insurance Information Institute, if you plan to use your vacation home exclusively for yourself, insuring it may be as simple as extending the policy you already have on your primary residence.
If you’ll be renting it out, though, you’ll need to buy a separate rental dwelling policy; that costs about 25% more than your primary home’s policy. Most rental dwelling policies reimburse for the loss of rental income if you can’t rent your place out while it’s being repaired due to damage from a covered loss.
Since owning a vacation home means you won’t be there all the time, you may need to hire someone to take care of it during your absences — or when you’re in between guests, if you rent it out.
For townhouses or condominiums, you homeowner’s association dues will handle outside maintenance. No such luck for single-family homes. Regardless, the inside is your responsibility.
If you’ll hire a property management company, figure on spending about $75 a month, not including the cost of repairs. This firm can also help you find renters if you want; expect to pay upward of 30% or more on the daily rent you take in.
Understand tax implications
Be sure you’re familiar with the vacation home tax rules, too, before making a purchase. The property will still qualify for the mortgage interest deduction, assuming the combined mortgages on both your homes don’t exceed $1.1 million. And property taxes are fully deductible.
Things get trickier, taxwise, when you use the vacation home as a rental property. “If you rent out your vacation home for more than 14 days a year, you will have to report rental income,” says Jared Callister, a tax attorney in Fresno, Calif. “But you will also be able to deduct rental expenses, like repairs and depreciation.”
What you can deduct depends on how much you use the place personally versus renting it out. Also, most states expect you to pay sales taxes on rental income.
Some cities and counties impose such taxes, too; they may go by other names, such as lodging, accommodations, hotel, bed, tourist or transient occupancy taxes. Be sure to find out whether you’d owe them so you’re not hit with a nasty surprise after you become a vacation-home owner.
Craig Venezia is a real estate writer for the San Francisco Chronicle and author of “Buying a Second Home: Income, Getaway or Retirement.” He and his wife own a second home in the San Francisco Bay Area.
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