Financing a Vacation Rental

From sorting through types of mortgages, lender practices and down payment requirements, financing a vacation rental can be very confusing.

Before you even head down that road, I suggest that you really think through the reasons for and the location of your desired income property. Will you have enough time to enjoy your new vacation home, setup the business and manage it? It's very rewarding, but also a lot of work that begins with financing your vacation rental.

Consider all of the expenses that come with financing a vacation rental. Taxes, association fees, business licenses, lawn care, snow removal and garbage collection, among unexpected expenses, can add up. If you don't achieve full occupancy, can you afford to pay these expenses out of pocket? If you have decided yes, I've got this, you will need to understand your income, debt, credit score and down payment requirements if an all cash purchase isn't in your cards.


Important Steps to Financing A Vacation Rental

  1. Know your debt-to-income ratio: In other words, understand the ratio of what you owe versus what you earn. To calculate your debt-to-income (DTI), add your total amount of debt payments per month (not including utilities) to your estimated investment home mortgage. Divide that number by your monthly gross income (before tax income). Voila, you have your DTI. To qualify, lenders generally want your DTI below 40%.
  1. Know Your Credit Score: Strong credit scores are required to obtain a loan for an income property, even more so than for a first home. Exact requirements may vary by loan size and down payment, but expect 725 to be around the minimum when financing a vacation rental.
  1. Know What Your Down Payment Will Need Be: You are going to need a down payment to buy a vacation rental. No question about it. Amy Sharpless-Cairn, a lending goddess, was kind enough to give me an overview of down payment requirements. She's originated over $165M in loans over the past six years and really knows her stuff.


financing a vacation rental

In a nutshell, the requirements are really confusing. I suggest that you reach out to someone in your area to understand the specifics of the mortgage you would need. There are conforming, non-conforming, high balance non-conforming and jumbo loans which may have balance restrictions and require anywhere from 20-35%+ down. That amount can increase if you are not a resident in the state/country you are purchasing, depending on the lender.


Condos Vs Homes When Financing a Vacation Rental

Condos tend to be a popular choice among new vacation rental owners. However, they can sometimes be a little more difficult to finance. You may also have occupancy ratio's to adhere to. For example, your condo of choice may have to be owner occupied, say 52% of the time, depending on the type of condo it is and the loan you fit. The condo type can be warrantable, non-warrantable or a condotel. Some of which can require larger down payments and significantly shorter mortgage length options.

A safe down payment estimate is 20-40% of the loan value, which can be a hefty amount. To find the cash, some people obtain a line of credit on their first home, tap into a 401k or borrow from their parents. A good mortgage lender is a must when financing a vacation rental, helping you to navigate your situation and avoid taking on too much debt.


Head ShotsThis guest post was written by Kris Getzie, Founder & Principal Consultant at Volo. She is a vacation rental expert and author of the recently published Vacation Rentals For Newbies.