Buying overview -> Second or Vacation Home

Second or Vacation Home

The mortgage process for second homes
is the same as that for a primary residence.

Although the application and approval process for a second home is the same as that for a primary residence, stricter approval guidelines and higher interest rates usually apply.

When buying a second home:
  • The allowable loan-to-value may be lower. There are very few programs for a loan amount over $417,000 and loan-to-value greater than 80%.
  • Certain property types may be difficult to finance, including rural properties that are off the grid, unusual structures like geodesic domes, or condos in an association which has very low rates of owner-occupancy and/or allows short-term rentals.
  • The interest rate and/or fees may be higher.
  • Two-to-four unit properties are generally not eligible.

 
If you are refinancing and have reported rental income from your second home on your tax return, a lender may consider your second home as investment property. This would mean a sharply higher interest rate and a lower permissible loan-to-value. The guidelines vary on how much rental income is allowed before your second home is viewed as an investment property. Conforming loan guidelines state that any rental income should offset only a minor portion of the property expense and support the fact the property is primarily occupied for the borrower’s personal use. Some lenders may allow more rental income as long as the second home is not primarily used to generate income. If rental income from your second home is an issue you may want to contact a mortgage broker who has multiple lending sources.

The IRS has some positive and interesting rules around second homes. You can deduct mortgage interest and property taxes on a second home as you can on your primary residence, subject to IRS limits and regulations. If you rent your second home out for 14 days or less during a calendar year, the rental income does not have to be reported to the IRS – even if it is thousands of dollars a day. However, if it is rented for more than 14 days all the income, including the first fourteen days, must be reported. For a more comprehensive look at the tax issues around second homes go here.