The Home Buyer's Korner

Information presented should be used for educational purposes only.

July 8th, 2015

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The Home Buyer’s Korner

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Second and Vacation Homes

second home 1If you’re thinking about buying a second home to spend some time in when you’re on vacation here are some things you should know.

Whether you’re picking up a small condominium near the beach or you’re looking at a beach-in/beach-out condo at your favorite resort, and you’re only going to be in the unit for short periods each year you may want to consider renting the property the rest of the time to generate some additional income.

If you want to secure financing for a second home with a Fannie Mae mortgage, the financing has both good and not so good points to consider. Maximum financing can often be secured at 90 percent of the sales price, but you’ll also be required to secure mortgage insurance unless you put at least 20 percent down. Getting mortgage insurance can be tricky; not only will your application be reviewed by the lender; it also has to meet the insurer’s requirements. Additionally, not all mortgage insurers offer insurance for second home with just 10 percent down, but if your lender is familiar with second home financing they should know who does and doesn’t offer it.

The interest rates will probably be less if you’re purchasing the unit as a second home versus an investment property purchase, but more than what you’d get if it was a primary residence.

Location is an issue to be concerned with if you’re looking for conventional financing. Fannie Mae wants the home to be at least 60 miles away from your primary residence. This may or may not be an issue for you. If you’re living in Seattle and want to purchase a second home here in Metairie you’re safe, but if you want a second home at your favorite lake nearby it could be a problem. The best solution is to look for a property on that meets the lenders guidelines and don’t try to convince them your selection is unique and need special consideration.

If you do find a property, but it’s within 60 miles of your home what most likely will happen is you will be offered financing, but under investment guidelines and interest rate.

When you apply for a second home your lender will want to show you have adequate reserves to afford this luxury item and they’ll ask you to verify you have at least six month of principle and interest payments in a liquid account.

Fannie Mae also doesn’t want you to rent your second home and you will have to sign a separate addendum to your mortgage that it basically states,” Borrower shall occupy, and shall only use, the Property as Borrower’s second home. Borrower shall keep the Property available for Borrower’s exclusive use and enjoyment at all times, and shall not subject the Property to any time-sharing or other shared ownership arrangement or to any rental pool or agreement that requires Borrower either to rent the Property or give a management firm or any other person any control over the occupancy or use of the Property.

If you can’t meet these financing requirements, you’ll want to consider a portfolio loan. Portfolio loans are mortgages often made by community banks and not intended to sale or transfer to Fannie Mae. They do normally carry larger down payments, shorter terms and higher interest rates. However, the bank is using their depositor’s funds, so they make the rules and they’re often fairly attractive to for a luxury purchase.

Once you have determined how you intend to finance your second home and if you can rent to out to generate some additional income, you’ll need to get it ready for your first tenants. Spend some time walking through the home to determine what’s missing and what needs to be upgraded. Do you have a few spare sets of sheets and towels? Are all of the kitchen appliances in top condition? If you’re going to be supplying soap, shampoo and other toiletries, are you fully stocked? Remember – your goal should be to impress each and every client to ensure they leave a positive review and come back again in the future.

Since it’s likely don’t live in the area, you’ll want to contract out the cleaning and management to local vendors who specialize in managing vacation properties. It should be relatively easy to find these companies with a quick web search, but be sure to ask for recent references, so you can rest easy knowing your home is in good hands. The best resource I can recommend is a local real estate agent or broker, as they often are experts in both managing and marketing second homes.

Once your home is prepared and you have your team lined up, it’s time to list your property on websites such as VRBO, HomeAway or AirBnB. Browse through other local listings to see how your competition markets their properties and average daily or weekly rates or ask your real estate agent if they will do this for you.

You may also be subject to local taxes. Most local tax authorizes requires taxes on units rented for less than 30 days and something you can find out about by talking with your local tax authority or bookkeeping service, but again the one person who’s going to know the answer off the top of their head and easy to locate is your real estate agent.

Finally, if you’re planning on managing the property yourself, you’ll need to figure out a way to provide 24 hour access, and you’ll need to set up a PayPal account or figure out another way for your clients to pay for their stay.

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