Tougher Loan Application Process
If you’re considering the purchase of a condo hotel or fractional ownership in a private residence club, you’ll want to begin investigating your financing options earlyon in the process.
Mortgage lenders readily admit that they’retougher on second home and vacation home loan applications than they are on primary-home loans. Why? Because the finances of a second-home buyer are, by definition, stretched thinner. And that means the lender is taking on more risk. After all, if you ran into financial trouble, which is the first mortgage you’d pay and which would you let slide?
That extra risk translates into mortgage rates that can run from one-quarter to one-half point higher than those for first residences. The same applies for origination points on vacation home loans-expect to pay a little more.
A Favorable Lending Climate
Bankers know that the typical second home owner is someone with a higher net worth and/or income than the typical single home buyer. And that’s the kind of person they want to have as a customer. Finally, interest rates, while they’ve risen somewhat from their historically low rates, are still very favorable.
Home-Equity Lines of Credit
Many lenders will encourage you to take out a home-equity line of credit on your primary residence to fund all or part of your second home purchase. With interest rates low, this option is certainly worth considering.
However, keep in mind that most home-equity lines of credit float a point or two higher than the prime rate, so you could end up repaying this piece at a much higher interest rate than if you had simply taken a mortgage for the entire amount. Plus, unlike mortgage interest, which is deductible on up to $1 million of debt on your first and second homes combined, the home-equity cap is $100,000. (You get a break on $1.1 million total.)
One trap to avoid is starting with a home-equity loan with the intention of taking out a mortgage at a later date. There is a little-known IRS rule that states that you have just 90 days from purchase to secure a mortgage against a principal or vacation residence. Once you pass that 90-day mark, you can’t deduct the mortgage interest at all.
How Does Rental Income Affect the Loan Process?
If you’re planning to receive rental income from the second home or vacation home, you may have to work hard to prove the property’s revenue potential to your lender. Lenders have a hard time selling mortgages on investment property in thesecondary market. Consequently, some lenders won’t even write those kinds of loans.
Lenders that will are going to want to see proof that the property is going to generate a decent cash flow. They’ll ask to either see a cash flow statement showing the property’s rental history. Or, if it’s a new property, they may ask for a statement from the management company.
If it’s a condo hotel unit and the lender is already familiar with the property and has it on its “approved list,” you may be able to avoid this step. One other possibility is that the lender will request a second appraisal that compares the rents and occupancy rates with other similar homes. This will cost you an extra $300-$600.
If you don’t need the rental income to meet the mortgage industry’s ratios, you may not want to mention to your lender that you’re thinking of renting. That is, you wouldn’t want to lie on your mortgage application because that’s a federal offense. However, it might be conceivable that you’re initially buying the vacation property for personal use. Later on, you might happen to change your mind, which is perfectly legal.
Check Loan Terms
While the best rates are important, don’t overlook vacation home loan terms. You want the right to prepay the loan in whole or part and without penalty. Otherwise, prepayment may result in additional and needless cost.
Ask Your Realtor for Advice
A good real estate agent familiar with the area is also likely to be familiar with lenders who can offer the most affordable or flexible financing. Often that realtor knows which lenders look upon condo hotels and fractionals favorably. The realtor may also be able to advise you of special lending programs being offered by the developers.
Information You’ll Need to Provide
Regardless of which lender you choose, you’ll likely be asked to provide detailed information about the vacation home in addition to your personal income data and credit history. For a condo hotel unit, lenders will likely want to schedule a site visit to the location and will need to know the following:
- Number of units
- Square footage of each unit type
- Breakdown of units per purchase price
- Rental rates by unit type
- Rental agreement for condo hotel program
- Management company
Condo Hotel Center has relationships with several condo hotel financing sources. If you can tell us a little about the property that you’re considering, we will gladly provide you with referrals. Contact us today (no charge, no obligation) at info@CondoHotelCenter.com or call (954) 450-1929.