6-22-18: We are thinking about buying a vacation home, what should we know?

Question of the week: We are thinking about buying a vacation home, what should we know?

Answer: With summer upon us and families travelling many may be considering purchasing a vacation home where they like to spend…well their vacations! Between June and September it is not unusual for us to get a few inquiries from clients considering purchasing a vacation home, some with different motivations that others.

In mortgage industry parlance a vacation home is known as a second home, which also follows the tax policies of the federal government and the states. As you can imagine there are sections of the tax code that deal with second homes and how you can, or must, treat them when filing taxes.

Traditionally a family would purchase a second home in the mountains, at the lake, by the ocean, wherever they enjoyed vacationing. Often the family vacation home would be passed down a generation or two. In more recent years second homes are typically still near traditional vacation or resort areas but not infrequently may be condominiums as well as detached dwellings.

The basic lending rules for second homes are similar to the rules for primary residences. You can purchase a second home with only 10% down, the cost of the loan in terms of rates and fees is the same as with a primary residence.

There are some factors to consider when getting a mortgage for a second home. First, since it is to be used as a residence you must be able to qualify for the total housing payment for your current residence plus the second home you are purchasing. Second, the second home must be “geographically distant” from your primary residence. If you live in a neighborhood on the eastside of Long Beach and want to purchase a condo in downtown Long Beach as a second home you will have a hard time finding a lender that would approve the transaction as a second home.

Some lenders require second homes to be traditional resort or vacation areas, for instance Mammoth would be such an area, Fresno would not. However, we often approve second home transactions for clients who have a very strong reason for the second home in a non-vacation region. For instance, a client whose primary home in in Ontario but works in Long Beach and purchases a small condo in Long Beach near his job for use during the week. Or the professor at Cal Poly San Luis Obispo whose wife and children live in Northern California. To qualify as a second home it has to be very obvious as to the intent, if you find yourself trying to stretch into a viable explanation then chances are the underwriters will have a difficult believe the property will be used as a residence and not a rental or investment property.

Regarding rentals, we see an increasing number of second home owners using various services to provide revenue when they are not using the property via short-term rentals—aka AirBnB or VRBO for example. If you are approved for a second home mortgage there is a rider to the deed (mortgage) that you will sign that has several clauses:

Must be located a reasonable distance away from the borrower’s principal residence
Must be occupied by the borrower for some portion of the year
Is restricted to 1-unit dwellings • Must be suitable for year-round occupancy
The borrower must have exclusive control over the property
Must not be rental property or a timeshare arrangement
Cannot be subject to any agreements that give a management firm control over the occupancy of the property
When a property is classified as a second home, rental income may not be used to qualify the borrower

Like with your primary residence, you can convert a second home to an investment property in the future, as long as you have fulfilled the intent to occupy that you have agreed to as part of your application process and by signing the Trust Deed. Should the lender be able to determine that you never intended to use the property as a residence they can issue a Notice of Default and demand the mortgage be paid in full.

For those nearing retirement, purchasing a second home where you are considering living in retirement can be a very good financial decision. We have had many clients over the years purchase a second home while they are still working. The advantages are the ability to qualify for a mortgage and leverage the purchase while you are still working, probably a lower price on the property than it may cost you in five, ten, fifteen years when you will retire, and the ability to enjoy the property and determine if it is the right place for you to spend your years in retirement. If you discover the property or location is not just right you have time to sell, or rent, the property and look for a better property and/or location for retirement.

When the time comes to retire you may decide to sell your current primary residence, possibly using the proceeds of the sale to pay off your retirement home and enter retirement without the number cost for retirees: housing.

If you, or someone you know, have been considering purchasing a second home please contact me to run the numbers and options for you and your family.

Have a question? Ask me!

Rates for Friday June 22, 2018: Not a lot of economic news this week impacting mortgage rates. The conforming rate edged up for the first time in six weeks as investors have been a bit schizophrenic trying to determine their best course of action with global trade issues and markets. Meanwhile the high-balance rate edged down a touch after last week’s rise. These are interesting times which means the most prudent course of action is to lock in your interest rate through your closing period as soon as you are able.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming 4.50% Up 0.125%

30 year high-balance conforming 4.625% Down 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

I think one of the toughest weeks for parents is that first week of summer vacation for your kids when you still have your weekday morning routine culminating with leaving for work and your kids have no routine, except possibly stay in bed while you go about your routine. I am very routine oriented so any changes in routine, for me or the house, tends to throw my rhythm off for a while. At least my nightly routine is not affected since I have been going to bed before the kids and Leslie since they were in middle school—we have three night owls and one early bird in the house.

I hope your routines and summer rhythms are in sync and enable you to enjoy the summer of 2018 to the fullest.

Have a great week,

Dennis