9/18/2014 Financing a Vacation Rental: A How To Guide http://www.tripping.com/blog/blog/2014/09/15/financing-a-vacation-rental/ 1/8 Financing a Vacation Rental: A How To Guide September 15, 2014 (http://www.tripping.com/blog/blog/2014/09/15/financing-a-vacation-rental/) From sorting through types of mortgages, lender practices and down payment requirements, financing a vacation rental can be very confusing. Before you even head down that road, I suggest that you really think through the reasons for and the location of your desired income property. Will you have enough time to enjoy your new vacation home, setup the business and manage it? It’s very rewarding, but also a lot of work that begins with financing your vacation rental. Consider all of the expenses that come with financing a vacation rental. Taxes, association fees, business licenses, lawn care, snow removal and garbage collection, among unexpected expenses, can add up. If you don’t achieve full occupancy, can you afford to pay these expenses out of pocket? If you have decided yes, I’ve got this, you will need to understand your income, debt, credit score and down payment requirements if an all cash purchase isn’t in your cards. Important Steps to Financing A Vacation Rental
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9/18/2014 Financing a Vacation Rental: A How To Guide
http://www.tripping.com/blog/blog/2014/09/15/financing-a-vacation-rental/ 1/8
Financing a Vacation Rental: A How To Guide September 15, 2014 (http://www.tripping.com/blog/blog/2014/09/15/financing-a-vacation-rental/)
From sorting through types of mortgages, lender practices and down payment requirements,financing a vacation rental can be very confusing.
Before you even head down that road, I suggest that you really think through the reasons for andthe location of your desired income property. Will you have enough time to enjoy your newvacation home, setup the business and manage it? It’s very rewarding, but also a lot of work thatbegins with financing your vacation rental.
Consider all of the expenses that come with financing a vacation rental. Taxes, association fees,business licenses, lawn care, snow removal and garbage collection, among unexpectedexpenses, can add up. If you don’t achieve full occupancy, can you afford to pay these expensesout of pocket? If you have decided yes, I’ve got this, you will need to understand your income,debt, credit score and down payment requirements if an all cash purchase isn’t in your cards.
Important Steps to Financing A Vacation Rental
9/18/2014 Financing a Vacation Rental: A How To Guide
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1. Know your debt-to-income ratio: In other words, understand the ratio of what you oweversus what you earn. To calculate your debt-to-income (DTI), add your total amount of debtpayments per month (not including utilities) to your estimated investment home mortgage.Divide that number by your monthly gross income (before tax income). Voila, you have yourDTI. To qualify, lenders generally want your DTI below 40%.
2. Know Your Credit Score: Strong credit scores are required to obtain a loan for an incomeproperty, even more so than for a first home. Exact requirements may vary by loan size anddown payment, but expect 725 to be around the minimum when financing a vacation rental.
3. Know What Your Down Payment Will Need Be: You are going to need a down payment tobuy a vacation rental. No question about it. Amy Sharpless-Cairn(http://www.academymortgage.com/lo/amysharpless), a lending goddess, was kind enoughto give me an overview of down payment requirements. She’s originated over $165M inloans over the past six years and really knows her stuff.
In a nutshell, the requirements are really confusing. I suggest that you reach out to someone inyour area to understand the specifics of the mortgage you would need. There are conforming,
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non-conforming, high balance non-conforming and jumbo loans which may have balancerestrictions and require anywhere from 20-35%+ down. That amount can increase if you are not aresident in the state/country you are purchasing, depending on the lender.
Condos Vs Homes When Financing a Vacation Rental Condos tend to be a popular choice among new vacation rental owners. However, they cansometimes be a little more difficult to finance. You may also have occupancy ratio’s to adhere to.For example, your condo of choice may have to be owner occupied, say 52% of the time,depending on the type of condo it is and the loan you fit. The condo type can be warrantable, non-warrantable or a condotel. Some of which can require larger down payments and significantlyshorter mortgage length options. A safe down payment estimate is 20-40% of the loan value, which can be a hefty amount. To findthe cash, some people obtain a line of credit on their first home, tap into a 401k or borrow fromtheir parents. A good mortgage lender is a must when financing a vacation rental, helping you tonavigate your situation and avoid taking on too much debt.
(http://www.volovantage.com/)This guest post was written by Kris Getzie,Founder & Principal Consultant at Volo.(http://www.volovantage.com/) She is a vacation rental expert and authorof the recently published Vacation Rentals For Newbies.
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