With the stress of running a medical practice and the lack of time to do much traveling, many doctors benefit from having a separate vacation home where they can escape for a couple of days at a time.
Before you commit to the purchase of a second home, you will want to consider how to finance the purchase and whether you can generate income from the property during periods you’re not using it.
Lenders are not always as accommodating when financing vacation homes
It may be more difficult to obtain financing for a vacation home than it is for your primary residence.
For starters, you will have fewer potential lenders if you wish to finance the purchase using a physician mortgage loan. This type of financing is designed for the unique challenges facing doctors and dentists who are starting out their careers later in life than other professionals, and doing so with a massive amount of student loan debt.
Lenders who provide physician loans will waive or reduce many of the requirements of traditional mortgages, including income requirements, debt-to-income ratios, and minimum downpayments.
However, many lenders restrict physician mortgages to primary, owner-occupied residences and deem loans for investment properties, second homes, and construction loans as ineligible.
In addition, even conventional mortgages can be hard to obtain depending on the lender and the property. Homes designed for seasonal often lack features that lenders insist on, such as central heating.
Vacation homes often have restrictions placed on them by homeowner or neighborhood associations that make lenders balk at financing. Lenders also realize that if the borrower’s financial situation changes, one of the first debts they’ll neglect is the mortgage on the vacation property.
To deal with these risks, lenders may require higher credit scores and/or downpayment for a vacation property.
It’s not impossible, however, to find physicians mortgage financing for vacation homes. There are lenders who promote the use of physician mortgages to buy a second home. One lender claimed it allows borrowers to finance up to 90 percent of the purchase price with no mortgage insurance on vacations properties.
Using a home equity loan
Another option to help you finance a vacation home is a home equity loan, provided you have a considerable amount of equity in your main home.
You might be able to borrow up to 80 percent of the equity in your home, and use those funds for any purpose. So if you own a $500,000 home with a mortgage balance of $250,000, you have $250,000 in equity. If you borrowed the full 80 percent, you could pay cash for a vacation home of up to $200,000.
An advantages of this option is that a home equity loan is secured by your main home. From the lender’s perspective, the second home doesn’t matter since a home equity loan can be used for anything.
This makes it less of a risk to the lender, which means you could obtain a lower interest rate than if you financed a vacation loan by obtaining a mortgage on that property. Also, a home equity loan will typically require fewer upfront closing costs and fees than a separate second mortgage.
Another benefit is that you may be able to take a tax deduction on the interest of a home equity loan.
The main downside is that you would be reducing the equity in your main home. But assuming you can use the amount to pay for the entire cost of the second home, you will have plenty of equity in that property.
If you don’t want to use all of your available equity to buy your vacation home, you can use some of it to make the required downpayment.
Is it a vacation home or a rental?
One way to help pay for a vacation home is to rent it during periods you won’t use it; online services such as AirBnB make it easy to find guests to stay in your vacation home. In some cases you can may use the rental income when calculating the debt-to-income ratio on the mortgage application.
Keep in mind, however, that if it’s rented out a certain number of days, the lender may classify it as an investment or rental property instead. Loans for rental properties typically have higher interest rates and stiffer qualification requirements than vacation homes.
The IRS will also treat your vacation home differently for tax purposes if it’s deemed a rental property. Their definition falls under the 14-day or 10 percent rule.
According to the IRS, you can rent a vacation home for up to 14 days a year and pocket the income without having to declare it on your tax return. Otherwise, you must report the rental income, but you also quality to deduct certain expenses.
If you personally use the property more than 14 days a year, or more than 10 percent of the number of days the home is rented out, whichever is longer, the house is considered your personal residence.
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