Buying a vacation home is very different from buying a primary residence. A homeowner who has bought a primary residence and is now thinking about buying a vacation property may be startled by the many differences between these two purchases. Knowing the differences can help a person decide whether or not buying a vacation home, that's waterfront real estate or otherwise, is right for them.
Vacation Home Mortgage Requirements
Lenders have different standards for people buying a vacation home versus people buying a primary residence. These stricter requirements can make buying a vacation home more difficult for the average person.
For example, a buyer is required to put down a much larger down payment on a vacation home than a private residence. Whereas a home buyer purchasing a primary residence with an FHA loan can put down as little as 3.5%, a person purchasing a vacation residence will be required to put down at least 10%. Buyers who put down 20% or more for their vacation home can avoid paying mortgage insurance, which helps to save money. Vacation home buyers with smaller down payments must pay for mortgage insurance to protect the lender from default.
In addition to the larger down payment, someone who buys a vacation home must also have a higher credit requirement. For vacation home purchases, lenders prefer to work with home buyers who have a credit score higher than 700. Those who have a credit score lower than 700 may need to pay a higher rate in order to qualify for a mortgage.
Given these stricter lending requirements, home buyers who have a borderline credit score or who have a smaller down payment to work with should contact a qualified lender before beginning the home buying process. Doing research before looking for a vacation home can help the home buyer to determine what type of home is going to be right for them, and whether or not this is the right time for them to purchase a vacation property.
Vacation Home Tax Implications
The new tax law has changed the tax implications of owning a vacation home. Home buyers who purchased vacation homes in the past are likely familiar with the mortgage interest deduction, which allows the homeowner to deduct the combined mortgage interest of their primary residence and vacation home, up to $1 million dollars. Under the new tax law, homeowners are only allowed to deduct up to $750 thousand.
Ocean Gate vacation homes that are rented out to others qualify as a rental home unless the owner occupies the home for more than 14 days per year. Homeowners who make income from their vacation home should consult with their accountant to ensure that their taxes are filed properly when the time comes.
In addition to the federal law requirements, vacation homeowners may need to pay sales city, state and county sales tax on their rental income. Again, a qualified accountant can help the vacation homeowner ensure that he or she is paying the sales tax properly. Doing this before the purchase is finalized can help ensure that the vacation homeowner is aware of all the requirements and remains compliant with the law.
Have a Discussion With Your Real Estate Professional
Homeowners who want to purchase a vacation home and who are unfamiliar with the process should start by consulting with a real estate professional. A good real estate professional can help a home buyer navigate the process of buying a vacation home. The real estate professional can also answer any questions that the buyer may have throughout the purchasing process.