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Financing Your Vacation Home
January 29, 2018
Are you in dire need of a vacation home but can't afford it? Maybe you want a vacation rental Orlando home or in other places like Los Angeles or Miami. You are on the right track to funding your future.
Owning a vacation property is a brilliant way to get started in real estate right now, especially if you’re situated in a popular vacation destination such as Orlando. Areas with high vacationers are experiencing an upsurge in demand for short-term basis rentals. There is also a rising number of websites to list your vacation property.
So, with the market-end pretty handled, how do you get in?
Your focus should be on financing. If you’ve identified the right location, based on the market (not your preferences), the next question should be whether you can foot the full cost of the property. No?
Well, don’t fret. Vacation homes might cost an arm and a leg, so, consider getting a mortgage from a good financing company. Forbes reported that over 60% of vacation homes are mortgage financed. Your dream vacation rental Orlando home could be one of them.
How to Get Approved for a Mortgage
Buying your vacation home could already be stressful. Further, being ill-prepared for the hassle that comes with getting the finances will heighten the anxiety. But why put yourself through all that while you’d possibly think like a lender?
By understanding the 101s of getting your mortgage approved.
First, before you take the plunge, be prepared to be under the scrutiny of the lending companies. They will look into everything – from your character to your credit score to determine if you are eligible for the loan. So, before you apply for the mortgage, get straight with the following things:
• Do you have constant monthly income?
This will determine whether you will be able to make frequent payments to cover the mortgage payment. Most lending companies do not give mortgages to people who are partially employed.
You stand a better chance of getting the mortgage loan if you reveal that the vacation home is to be used for rental purposes. Your second home can generate the income for the mortgage by paying for itself. If you are too busy to manage a rental, solicit the services of a property management or vacation rental management company to deal with the nitty-gritty.
• How good is your credit score?
Your credit score tells the lender that you have a history of timely payments on your borrowed loans. Therefore, you can be trusted with another loan.
• What kind of house can you afford?
There are different price ranges for apartments, villas, mansions or condos. Go for what is within your price range. Get advice from vacation rental management companies on the best affordable homes to go for.
• How much down payment can you put down?
In the current economy, lenders require that you put down at least 10% down payment. That is if you are not on a special loan program.
Commit to a maximum figure that you are willing to spend on the house before you embark on the application process. It is prudent to take up a small payment that you can afford to pay in simple installments in good time. That is a better option over a huge figure that may lead to the foreclosure of your dream vacation rental Orlando home.
Preliminaries to Getting a Vacation Home Mortgage
When you make the decision of buying your vacation home, you may want to get preapproval form a local bank, mortgage broker or credit union. In this digital age, you can get approved online by the vast resource of National Online Mortgage Lenders. The preapproval is important because it serves as an indicator of how qualified you are for the mortgage.
In other cases, you may be required to get a pre-qual or a pre-qualification depending on the lender you are going for. This is a non-binding agreement between you and the mortgage lender indicating that you can be approved for the mortgage. They judge this based on your credit score, income, and other aforementioned factors.
Despite the fact that the pre-qual and the pre-approval are non-binding, most lenders insist on seeing both a couple of days after they receive your mortgage request. Some of the documents needed to get pre-approved include:
• W2s for the past Two years.
• 2 years tax returns
• Credit score report
• Paycheck stubs from the past Three months.
4 Common Types of Vacation Home Financing to Expect:
1. Conforming Loan: The lending qualification for this a conforming loan are more lenient for a vacation home property than for rental property or for a primary residence. Most lenders would expect a 20% down payment and a credit score of over 680.
2. Balance Sheet Loan: This mortgage type is kept on a lender’s balance sheet in their investment portfolio. Balance sheet loans include: jumbo loans, rental property loans, and cash-out refinance.
3. Portfolio Loan: This loan type is best suited for individuals looking for finance to invest in multiple rental properties at once. They have fewer property requirements and offer lower personal qualification requirements.
4. Multi-family Loan: This loan type is used to finance an apartment with more than 4 units and multifamily vacation homes with 2-4 units.
Finding the Right Lender
If you are new in the property industry and this is the first vacation home you are thinking of investing in, it doesn’t do you any harm to get the services of a mortgage broker. They can connect you to a vast network of lenders who will be more than happy to give you a mortgage on more favorable terms.
However, if you are thinking of building a portfolio of vacation rental homes, then it is prudent to go to a direct lender. That is the actual financial institution that is getting you the loan.
A real estate agent, vacation rental management or property management company are good sources for information on good mortgage lenders. For instance, property management companies working for vacation rental Orlando homeowners know the best financers of vacation homes within Orlando. You can also ask your family or friends to give you appropriate referrals.
In a nutshell, here’s how to pick the best mortgage lender:
• Know your credit scores
• Find the right vacation home mortgage fit.
• Pick the kind of lender that you want – are you looking for a small or a big bank.
• Shop different lenders and compare their APR.
• If you are not into DIY mortgage shopping, consider hiring a mortgage broker.
• Get a few loan estimates
• If you’re in Orlando, get local lenders and be ready for a possible handoff of your mortgage. From your original lender to a secondary different company.
Finally, when you have at least three lenders in mind, go online and search for their fees and down payment policies. You will find that most lenders will require you to have at least 6 months’ worth of cash reserve before you apply for the loan. Compare their rates against the current mortgage rates to get yourself the best deal.
Buying a vacation home is a viable way to invest in real estate. Currently, with the vantage of online rental platforms and professional vacation rental management companies, the vacation home industry is booming. You will get to enjoy high rent yields and a handsome profit.
However, they also have costly expenses associated with them. Offsetting your mortgage cost should be the least of your worries! Finding the right mortgage to finance your investment will, certainly, keep your overheads low and maximize your returns.
There you have it, your dream vacation rental Orlando home is as good as yours once you get a good lender. Your second home can be your new source of income, so, be sure to get a good vacation rental management company to manage it for you.