Owning a vacation rental property has proven to be a very lucrative investment. Take Airbnb, for example. The option to rent an Airbnb over a hotel has proven to be the more popular route, as they provide a more homelike feel, and more privacy. In our previous blogs, we’ve discussed how vacation rental properties can be a good investment, as well as tips for how to manage a vacation rental property. In this blog, we’re going to go over the options for financing one, so you can be better prepared to begin your vacation rental property dreams.
For most people buying their first vacation rental property, the most common option is the traditional or conventional loan. When it comes to loans, traditional are pretty straightforward, and offer some of the most competitive interest rates in the market. However, like most loans, there are certain criteria borrowers will have to meet in order to qualify. Most lenders will generally want to know two factors: the creditworthiness of the borrower, and their debt-to-income ratio.
Unlike traditional loans, asset-based loans for investment properties are evaluated by the actual or potential income of a property (rental income) rather than a borrower’s debt-to-income ratio. Asset-Based lending typically has a faster closing process and less documentation compared to traditional loans, and can be a good option for those looking to scale their portfolio and add new properties. However, the rates for asset-based loans can be higher due to there being no personal income requirements.
If you have enough equity in your home, and it makes financial sense to refinance at the current rate, you may be able to get the cash to buy your vacation home by doing a cash-out refinance. This is when you replace your current loan with a new mortgage loan for a larger amount, and keep the difference between the two loans in cash.
Another option for those with substantial equity in their home is a home equity line of credit (HELOC). A HELOC is a revolving line of credit that lets you borrow against the equity in your home. This means you won’t have to refinance your current mortgage when financing a vacation home. Your first mortgage will remain as is while you add a new mortgage with different terms.
Getting Approved for Financing a Vacation Home
Compared to loans for primary residencies, second home mortgages can be a bit harder to acquire. However, there are steps you can take to enhance your chances of getting approved for a vacation rental property mortgage. Here are some things to consider:
- Strong credit score: When it comes to financing a vacation home, having a strong credit score is very important for approval. A strong credit score and a good available balance lets a lender know you are less likely to default on the mortgage payment.
- Low debt-to-income ratio: This ratio compares an individual’s monthly gross income and their debt payment. Most lenders require a DTI below 45% before financing a vacation home.
- Higher Down Payment: The down payment for vacation rentals is usually between 20-30%. Lenders like to see these funds in an account for at least two months.
- Reserve funds: In addition to having funds available for the down payment, lenders like to see reserve funds before financing a vacation home.
It’s important to note that financing options vary from lender to lender, so be sure to research what type of financing fits your needs, and then discuss your options with reputable lenders.
Looking to Purchase a Property for Rental Income?
Here at RCN Capital, we have flexible options that are suited to your needs. Our short-term loan program offers a 24-month term, with a 12-month extension available, ensuring that our customers have rental property financing that goes the distance. Reach out today to learn more about our financing options.