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.
Would you like to make your home look more expensive without breaking the bank? Here are 5 tips for getting that luxury look for less. Call it "more splash then cash."
What’s the first step of the home buying process?
Answer: The Mortgage Pre-Approval.Unless you are paying cash for a house, you will need to get a mortgage. In order to know how much home you can afford, you will need to get pre-approved for a loan. This is the first-step in the home buying process.
How Long Does it Take To Buy a Home?
Answer: Around 30 daysThe timeline for finding a house varies greatly from person to person. Once you find a house and have an accepted offer, it usually takes around 30 days to close.
What Does A REALTOR® Do?
Answer: Almost everything.A REALTOR® is your most valuable asset when buying a home. They will walk you through every part of the home buying process. They will educate and inform you of all your options. They will represent you throughout the transaction and beyond.
How Much Do I Have To Pay a REALTOR® as a Homebuyer?
Answer: NothingIn most cases, you do not have to pay your REALTOR® anything to help you purchase a home. The sellers pays their REALTOR® a fee, and then that listing agent pays the buyers agent for bringing the buyer and facilitating the transaction.
What’s Your Best Advice for First-Time Homebuyers?
Answer: Trust the Professionals.Beware of advice from people who do not work in the industry. Real estate is a popular topic and almost everyone feels like they have some great insight to offer. In reality, the people who know best are the people that work in the business. Good REALTORS® have sold hundreds (maybe thousands) of properties. We know what to expect and what to look out for. Friends and relatives have only bought and sold a few homes, if any at all. Buying and selling a couple of homes does not make someone a well-rounded source of information. I’ve seen too many first-time buyers become persuaded by well-meaning friends and family, only to be disappointed later. Be confident in your decisions and trust the professionals.
What Kind of Credit Score Do I Need to Buy a Home?
Answer: 620+A 620 credit score, or higher, is recommended. As you are probably aware, a higher credit score offers better lending terms. This is an ever evolving topic, however, as loan requirements are constantly changing. There are some lenders who will approve buyers with a 580 score, sometimes even lower. Your loan officer will be the best source to give you a current answer for today’s lending requirements.
Are There Special Home Buying Programs That I Should Know About?
Answer: YesThere are some great home buying programs to research. The main ones would be VA loans, USDA loans, and FHA loans. Knowing the difference between these loan types is very important. Other local options would include the The El Paso County “Turnkey” Mortgage Program and the CHFA SmartSteps Plus Purchase Mortgage Program. Both provide down payment assistance under certain conditions.
How Much Money Do I Need for a Downpayment?
Answer: It depends on your loan type. Usually 3% to 5% down.The most common answer is 3% to 5% of the purchase price. FHA loans just dropped their requirement from 3.5% to 3.0%. There are also some conventional loans that only require 3% down. Veterans are usually eligible for a VA loan, which requires no money down. Properties in rural areas are usually eligible for a USDA loan, which also requires no money down.
When do I get the keys?
Answer: At ClosingUnder normal circumstances, you will get the keys at the closing. A closing typically takes about an hour. In some cases, the lender will need time to fund the loan and you will need to pick up the keys after the loan has been funded. If you have a Friday evening closing and the loan cannot fund until Monday, you may not get the keys until Monday. Make sure to coordinate your closing to get the keys on the same day, if that is what you need.
From: greatcoloradohomes.com by Andrew Fortune
Tress Realty Group compiles some of the best real estate news, tips, and information for buyers, sellers and investors.