Loan options with 10% down
A common misconception is that it takes a huge down payment to buy a second home. In fact, loan options with as little as 10% down are available. This is true even on jumbo loan amounts (those over $453,100).
Favorable owner-occupied rates
Any property you plan to keep for your own use is considered “owner-occupied”. Owner-occupied properties qualify for favorable loan terms. The interest rate on secondary residences and primary residences is exactly the same for loan amounts up to $453,100 (conventional, conforming loans). Although jumbo loans (larger than $453,100) may carry a small premium in rate, the rates are generally no more than .25% higher that on a loan for a primary residence.
Not just vacation properties
Although a secondary residence is often in a resort location, this is not necessarily the case. Maybe you plan to relocate or retire to a different city, but want to buy a home today (before rates and prices increase) — you may be able to purchase your future home as a second home and start enjoying it today. Or maybe you visit your kids in another city often enough that purchasing a little home or condo makes sense (and would give everybody a little more elbow room and privacy). Secondary residence financing can work perfectly for these situations.
Home for your college-bound kid
Fannie Mae has a little-known program that permits parents to purchase a second home in the town where their child will be attending college. So long as you plan to stay with your child when you visit and your child will be attending school a reasonable distance from your home, you may be able to use favorable secondary residence financing to purchase a home or condo. Why not turn the necessity of student housing into a family investment?
Limited rental income may be allowed
In general, a secondary residence must be held exclusively for your personal use. The closing documents you sign will include language stipulating that you will keep the property available for your “exclusive use and enjoyment at all times” and will not enter into any time-sharing or rental pool or give a management firm “control over occupancy or use of the property”.
This requirement lasts for the first year that you own the property. After a year of exclusive use, you could hire a property manager to market your vacation home as a rental when you are not there. If you plan to rent out your vacation home right away, you could have to finance the property as a rental/investment property, which means making a larger down payment and paying a higher interest rate.
We do, however, have a few loan options that allow some “incidental” rental income from a second home. This could allow you, for example, to rent to friends or family on occasion during your first year of ownership without violating the terms of your loan.
Consider a duplex
If you want to have your second home and rental income too, you may want to consider purchasing a duplex second home. If you hold one unit for exclusive use, you are allowed to rent the second unit full-time. Duplex second home purchases allow a higher loan amount ($580,150) but down payment options start at 20%.
Many resort destinations have properties that function like a hotel or motel, but have individually owned units — called “condotels”.. HIstorically, it has been very difficult to finance condotels. Recently, Fannie Mae updated and clarified the definition of a condotel. Many properties that would have previously been considered a condotel may now be eligible for a Fannie Mae loan. And even if a property is truly a condotel, there are still financing options available (but plan on navigating more restrictive guidelines, putting more down and paying a higher rate).
Potential tax benefits
When the time comes to fill out your tax return, you may reap some benefits from owning a second home. You could write off up to $10,000 of state and local taxes, which includes the property taxes on a second home. And the interest on up to an aggregate of $750,000 of mortgage debt used to acquire or improve a second home home or primary residence can be deducted.
Worth noting, if you rent your second home for more than 14 days of the year, you are required to report the income on your income tax returns. Doing so may also limit your mortgage interest write-off to the amount of income the property generated. Be sure and talk to a qualified tax advisor to see how the purchase of a second home will impact your tax situation.
Stop daydreaming and give us a call
If you find your mind wandering to a sweet little getaway, stop daydreaming and give us a call. We can help you explore financing options and get pre-approved so that you can start your search for the perfect home away from home.
Guaranteed Rate does not provide tax advice. Please contact your tax advisor for any tax related questions.
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