How To Buy a Vacation Home With No Money Down
If you’re looking to live in the lap of luxury or make some extra income renting out a house, a vacation home is a great investment. But, can you purchase that second home if you’re not planning on putting any money down?
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Real estate experts weigh in on what you’ll need to do to buy a vacation home without putting any money toward the sale.
Know How Much You Can Afford
If you’re not making a down payment toward your second home, you should be very aware of how much you can afford to pay every month, especially if you already are paying a mortgage for your primary home.
Shelby McDaniels, the channel director for corporate home lending at Chase Home Lending, said the Chase affordability and mortgage calculator helps buyers determine how much they can afford and how much they might qualify for, but that’s not all you need to know.
“Before you apply [for a loan], review your credit score, assets and income, just like a lender will,” McDaniels said. “Be aware that a lender’s qualification requirements will likely be more substantial for financing a second home than a first.”
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Determine the Purpose of the Property
Is your second home going to be just for you and your family to enjoy, or are you going to rent it out? McDaniels said it’s imperative to know your plans for the house before you look into purchase options.
“If you intend to use the home as a rental property either part time or full time, be sure you’re not violating the terms of the specific mortgage,” McDaniels said. “Properties must be considered investment properties if an owner intends to rent it out for any period of time. Investment properties present additional risks to lenders and may require a separate mortgage application process and terms, like higher interest rates.”
Apply for a Loan
One way to purchase a second home without putting any money down is to get a loan. However, since you’re not putting any money down toward the home, lenders want to see other evidence that you’ll be able to pay back the loan.
“Financing a second home adds additional financial pressure to a homeowner,” McDaniels said. “When applying for a mortgage for a second home, lenders may require borrowers to have higher credit scores, lower debt-to-income (DTI) ratios and extra funds in reserve.”
Find the Right Lender
Traditional banking institutions will be pretty hesitant to lend money to a person not putting any money down for home.
Sebastian Jania, a director at Manitoba Property Buyers, said it’s not impossible to buy a second home without putting money down, so long as you find a lender who is willing to approve a no-money deal.
Jania said one way this can happen is if the vacation home is purchased at such a discount that the lender knows it is protected, just as a down payment would protect it. Another way to get a lender to approve a no-money deal is to get a little creative.
“This could come in the form of the seller ‘becoming the bank’ for the buyer,” Jania said, “or the buyer could take over the seller’s current mortgage in the form of a strategy known as ‘subject to.'”
Jania said that knowing the seller’s current situation can be advantageous to a buyer.
“Do they need the money immediately? Are they in a situation where a solution like ‘subject to’ would make the most sense? The best advice for someone looking to buy a vacation property with no money down is to find a seller whose situation fits for a creative approach, rather than try to ask every seller to go with an offer like this.”
Explore Financing Options
Buying a vacation home means there are certain financing routes you can go that aren’t available to you if, say, you’re buying your first home.
“Some lenders may offer loans with lower down payment requirements compared to traditional mortgages,” said Rinal Patel, co-founder of We Buy Philly Home.
For example, you might be able to refinance your primary residence and use the equity to pay for your second home. This is known as a cash-out refinance, and you’d essentially be replacing your current mortgage with a new loan.
Get a HELOC
A home equity line of credit (HELOC) provides a revolving line of credit for a second home by borrowing against the equity in your first home. With a HELOC, you’ll have a certain credit limit, and you can borrow until you hit the threshold. Some buyers will do this so they don’t have to refinance their first home and can keep the same interest rate on their mortgage.
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