The majority of people who decide to purchase a vacation home are not aware that buying vacation property is different from buying a primary residence. Mortgage considerations and tax implications are different for vacation properties. Knowing the differences between these two types of purchases can help home buyers make good investment decisions. If you're thinking about buying a vacation home, here's what you need to know.
Taxes can get complicated for homeowners with second homes or vacation properties. Federal, state, and local laws all come into play for homeowners with a second property.
Second Home Versus Investment Property
Second homes and investment properties are taxed differently, so homeowners need to be aware of the differences to avoid tax penalties. In order for a vacation property to qualify as a second home, the homeowner must occupy the home for at least 14 days out of the year.
Mortgage Interest Deduction
The mortgage interest deduction is a popular tax deduction that has been in place for years. This tax deduction allows homeowners in the U.S. to deduct mortgage interest from their annual income taxes. Homeowners who have a second home (not an investment property) can deduct their combined mortgage interest, if the sum is less than $750,000.
Rental income from a second home is subject to sales tax in many communities. Rates can vary from one state and city to another, so homeowners who aren't sure how much to pay and how to pay should work with their accountant.
It's often harder to get a mortgage for a second home than it is to get a mortgage for a primary residence. Home buyers who want to purchase a second home must have a good credit history, proper paperwork, and adequate resources in order to qualify.
There are many loans for primary residences that require a minimum down payment of 3.5%. The down payment for a second home is at least 10%, and most lenders expect home buyers to put down 20% when buying a vacation home.
Home buyers need good credit history in order to qualify for a loan on a vacation home. Typically, lenders look for a credit score of over 700. While buyers with a score lower than 700 may be able to qualify for a loan, the lender may give them a higher interest rate. If the credit score is too low, the lender will not loan the money at all.
Buyers who want to ensure that they have the best shot at qualifying for a mortgage should check their credit report for errors before applying for a loan.
Work With the Experts
If you're an Independence home buyer who is thinking about purchasing a vacation home, contact a real estate professional in the area where you're thinking about buying. Working with a real estate professional can help you find a home in your budget. A good real estate agent should have knowledge of the neighborhoods in the area where you would like to buy, to help you identify properties you may not have otherwise considered.
Work with a reputable lender as well. An experienced lender can assess your financial situation, make suggestions that would make it easier for you to qualify, and can also work with you to find the best loan for your needs. Call the professionals to get started today.