Every year about this time the calls begin to come in. They go something like this: “We were up skiing this weekend and would really like to buy a place up in the mountains … “
Now, when you get as long in the tooth in this business as I am, you see a lot of trends and you can anticipate where this is going to go. That said, I figured now would be a good opportunity to clarify one of the biggest misunderstandings with second/vacation homes: Can I rent my second/vacation home?
The best starting point is to understand the three different ownership categories of residential property:
- Primary Home: This means you live in the property as your main day-to-day residence. These loans have the most favorable terms and options available.
- Second Home: The distinction here for financing terms is not much different than a Primary home. You will be required to put at least 10% down in most cases, with most people opting for a 20% or more down payment. The biggest myth to dispel, though, is to know that lenders won’t let you rent the home out if you are financing it as a second home. This will be more clear as you read below.
- Non-Owner/Investment Home: Commonly referred to as a rental property, these loans have higher rates (usually .25-.5% higher) than Primary or Secondary homes and require larger down payments (typically 20-25%). Typically, you can use the rental income to help qualify for these properties. These loans are structured to specifically allow you to rent the home and also use it when it is not rented.
The best thing about a second home loan is that the rates are the same as a primary residence. However, the biggest misconception, even from some loan officers, is that you can’t rent out the property. Naturally, people want their cake and eat it too, getting the interest rate terms on a second home and also renting it out. However, it is not allowed.
There is an antiquated definition still being used that holds as long as you occupy the second home for at least two weeks out of a year, you are then free to rent it out the rest of the time. This is simply false and here is why: When you get a second home loan there is an additional document called a “rider” to the deed of trust, which spells out additional and specific loan requirements.
Every second home buyer/borrower should read these requirements, so here they are:
This language, though hidden deep in the loan documents you’ll sign at closing, makes two critical points:
- You can’t rent the home.
- If you applied for a second-home loan and rent it out, your entire loan balance could be called due and payable by your lender because you will be in violation of the terms.
Consequently, if you plan to afford a vacation home by renting it out, you must use a non-owner-occupied loan. As noted above, this means you’ll need to put down a larger down payment, and your rate will be slightly higher. But, it’s a small price to pay for the flexibility of earning income from a home that you can also use for your own enjoyment.
Author’s Note: A couple of weeks ago, I had this exact scenario played out for a borrower of mine in Steamboat Springs (CO). The other lender they were working with was telling them the old rule in an effort to show them a more favorable interest rate. When I provided my now client with the actual legal docs seen above, that interestingly enough the other lender wouldn’t give them, they were floored. Ultimately, we structured a superior financing plan and they are thrilled with their purchase. Call me (720-205-8847) if you have any questions about how to best finance your dream vacation home!